• Hartalega acquire 95.1 acres Kuala Langat land for RM263.1m to develop NGC 2.0 for future expansion plan.

• Rationale for land acquisition is due to its strategic location as well as ready access to utility supply and land transport. NGC 2.0 will have 7 new plants with a total capacity of c.32bn pcs p.a.

• We are positive on the acquisition as it is expected to enhance Hartalega’s long term earnings as well as to remain competitive in the industry.

• Maintain HOLD with an unchanged TP of RM6.50.

Kuala Langat land to base NGC 2.0

Hartalega announced that its subsidiary Hartalega NGC SB (HNGC) had entered into a Sale and Purchase Agreement (S&P) with Bonus Essential SB (BESB) for the purchase of 95.1 acres of land at Mukim Tanjung Duabelas, Daerah Kuala Langat, Selangor for the sum of RM263.1m (or RM63 psf). The land acquisition will be funded via internally generated funds and/or existing credit facilities of HNGC with expected date of completion by 2HCY22. Acquisition purpose is for NGC 2.0 capacity expansion plans to meet growing future global glove demand.

Acquisition rationale and salient points of the NGC 2.0 project

The site was chosen due to its strategic location in a rapid developing industrial and housing area with ready access to utility supply (gas, electricity & water) as well as close proximity to the West Coast Highway. Salient points of the NGC 2.0 project are i) construction of 7 new plants with a total of 82 lines, ii) the first of the lines to be commissioned in 2022 with full lines completion targeted in 2029, and iii) upon full NGC 2.0 completion, an approximate 32.3bn pcs p.a. (+74%) additional capacity would be installed bringing total capacity to 76bn pcs p.a. (refer table 1). It is anticipated that total projected investment to be c.RM3bn.

Our thoughts on the acquisition

We are positive on the acquisition as it is expected to continue to create greater value and earnings potential for Hartalega’s long-term growth. We believe through this organic growth, the company is able to plan its production facilities in the most efficient and cost effective way. As at 9MFY20, Hartalega had a net gearing of 0.02x and a cash balance of RM205m. Our calculation implies that net gearing would slightly increase to 0.1x post-acquisition.

Maintain HOLD with unchanged TP of RM6.50

Maintain HOLD recommendation with unchanged TP of RM6.50 based on 40.5x PER (1SD above 5-yrs historical forward mean) pegged on FY21 EPS. We like Hartalega for its solid long-term prospects underpinned by capacity expansion, leadership position in nitrile glove with greater innovation and automation. However, we believe the stock is fully valued with lofty valuation at PER 41.3x on FY21 EPS.

Source: BIMB Securities Research - 26 Mar 2020