• Overview. 1QFY20 revenue increased to RM920m (18.3% qoq, 43.7% yoy), while net profit jumped to RM219.7m (90.1% qoq, 133.6% yoy). The stronger results were mainly due to i) higher sales volume (8.3% qoq, 18.3% yoy), ii) higher blended ASPs (+5% qoq) and lower overall operating cost. Profit margin improved to 23.9% (+9 ppts qoq, +9.2 ppts yoy).

• Key highlights. Hartalega has current installed capacity of 39.7bn pcs p.a with plant utilization rate staying high at c.100% in this quarter due to greater demand. Hartalega is ramping up the remaining 4 lines of Plant 6 and targeting commissioning of 1st line in Plant 7 towards 4Q of CY2020 which will raise its installed capacity to around 43.7bn pcs p.a (refer table2). Estimated blended ASP qoq to increase by 30% in Sep’20 qtr and Dec’20 qtr (or Hartalega’s 2QFY21 and 3QFY21).

• Against estimates: Above. 1QFY21 net profit is considered above our full year forecast at 26% as Hartalega is anticipating to register supernormal earnings in subsequent quarters on the back of high ASPs.

• Outlook. Unabated and rapidly increasing global Covid-19 infections are skyrocketing demand for medical gloves. We expect Hartalega to record sequentially supernormal earnings on the back of higher ASPs as well as increase economies of scale. Long-term demand post Covid-19 is anticipated to remain higher >+12% p.a on greater hygiene awareness, as well as structural change in gloves usage globally in non-medical sectors such as food and services industries.

• Earnings revision. We were conservative in our previous Hartalega’s ASP forecast as we had assumed that it would likely to raise prices on a more gradual basis against its aggressive peers. As such, we raise our FY21/FY22 earnings by 98%/95%, mainly taking into account for higher ASP and utilization of >95%. We now expect profit margin to hold at 30.2%/27% in FY21/22 (+10ppts/+9.8ppts from previous estimate).

• Our call. We derived a new TP of RM21.70 (from RM12.40) based on PER of 44x (+1.5SD above 5yrs historical forward mean) pegged on FY21 EPS. The premium PE to its peers can be justified by its leadership position in nitrile glove technology with greater innovation. Maintain HOLD as we believe the stock is fully valued, currently trading at 45.4x of 12-mths rolling forward PE and restricting further PE rerating unlike its peers. Accumulate on dips

Source: BIMB Securities Research - 5 Aug 2020