• Overview. 4QFY20 revenue increased to RM777.9m (13.9% yoy), while net profit jumped to RM115.6m (27.9% yoy). The better results were mainly due to higher sales volume (18.3% yoy) and lower overall operating cost especially butadiene raw material (c-24% yoy, source: Bloomberg). On qoq basis, net profit fell -4.7% mainly due to lower ASP (c.-2%) in tandem with lower material cost as well as net foreign exchange loss of RM36.5m.
• Key highlights. Hartalega has current installed capacity of 38.1bn pcs p.a with plant utilization rate staying high at c.96% due to increase in sales volume. We expect utilization rate to remain above 90% in FY21. Hartalega is ramping up the remaining 8 lines of Plant 6 and target commission of 1st line in Plant 7 towards end of CY2020 which will raise the installed capacity to c.44bn pcs p.a (refer table2). Restocking activities have been observed which led to longer average order lead time of >80 days compare to 40-50 days normally.

• Against estimates: Inline. FY20 PATMI of RM434.8m was inline with our and consensus forecast at 96% and 95%.

• Dividend. A 3rd interim DPS of 2.05 sen was declared, bringing YTD FYE20 DPS to 5.65sen. We expect total FYE20 DPS of 7sen, translating into DY of 0.8%.

• Outlook. We expect Hartalega’s FY21 to register a record year as beneficiary from ongoing Covid-19 outbreak. A prolonged Covid-19 (which the outbreak duration is longer than our previous expectation) is positive for glove demand which is outstripping supply at least over the medium term, implying firmer than expected margins. As such, we have raised our earnings forecast higher for FY21/22 by 17%/15% respectively as we increased sales and imputing higher ASP (c.+5%). We expect profit margin to hold at c.18.3% (+3.4ppts yoy) in FY21 on the back of i) increase in demand & ASP, ii) lower raw material prices and iii) favourable currency.

• Our call. We have derived a new TP of RM9.45 (from RM8.05) based on PER of 50x (2SD above 5-yrs historical forward mean) pegged on FY21 EPS. The premium to its peers can be justified by its leadership position in nitrile glove with greater innovation and automation. Maintain HOLD as we believe the stock is fully valued, trading at current lofty valuation of 53x forward PER and much of FY21f earnings growth of 47% have already been reflected in the strong price YTD outperformance of +67%. Accumulate on dips.

Source: BIMB Securities Research - 19 May 2020