• Hartalega’s growth to be supported by additional capacity from NGC plant 5 (4.7bn pcs; Aug 2018), plant 6 (4.7bn pcs; 1HCY19) and plant 7 (2.6bn pcs; 2HCY19).

• Newly-launched AMG product to spearhead future growth with targeted 10% contribution of its total export in the first year.

• We revised our FY19/20/21 earnings by +5%/+9%/+10% respectively assuming higher sales volume, greater plant capacity and productivity, as well as weak ringgit.

• Maintain HOLD with new TP RM6.80 (previously RM5.50) based on CY19 EPS pegged to higher PER of 39x.

Capacity expansion to support robust demand

Hartalega had strategized capacity expansion that is governed by global demand and supply dynamics. For FY19, earnings would be boosted by Plant 5 additional capacity. Management targets Plant 5 to add 2 new lines operational per month reaching maximum 12 lines by Feb 2019 with total additional of 4.7bn pcs (+c.14%). Moving forward, Plant 6 and 7 would provide additional 7.3bn pcs with overall completion could see total capacity of around 42bn pcs pa (+c.40% from current) by 2020.

AMG to spearhead growth

The recent launch of Hartalega’s Non-leaching Antimicrobial Medical Gloves (AMG) are expected to be a game changer for the company as it is safer and desirable for usage in the medical profession. The first AMG shipment is for the European market (Sept 2018), while the US market is to follow suit upon USFDA approval expected by 1HCY19. We estimate AMG to contribute 10% of total export volume sold during its first year with competitive pricing, i.e. 5% premium versus nitrile glove ASP to encourage better take up rate.

Earnings revised upward

The resilient demand accompanied by additional capacity from plant 5- 7 as well as current weak ringgit will lead to higher earnings going forward, based on our estimates. Hence, we revised our FY19/20/21 by +5%/+9%/+10% as we raised our sales volume to take into account higher demand, as well as factoring in weak ringgit assumption.

Maintain HOLD with higher TP of RM6.80

We have derived a new TP of RM6.80 (from RM5.50) in light of the revised earnings. The TP is based on CY19 EPS pegged to PER of 39x (+1.5SD above 3-years historical mean forward PE) from 34x previously. The premium valuations are justified by its nitrile glove leadership position, strong operating efficiencies and higher margin compared to its peers, in our view. Maintain HOLD.

Source: BIMB Securities Research - 20 Aug 2018