• Hartalega announced acceptance of Kumpulan Tanjung Balai SB “Offer To Sell” 60.57 acres of land in Sepang for RM158.3m.
• Acquisition is to build additional glove manufacturing facilities (NGC 1.5) with estimated installed capacity of 19bn pcs p.a.
• We are positive on the acquisition as this could hasten expansion plans in exploiting elevated global glove consumption and maintaining its long-term competitive edge in the industry.
• Upgrade to BUY with an unchanged TP of RM21.70.

Planning to acquire 60.57 acres of land for RM158.3m

Hartalega announced that its subsidiary Hartalega NGC SB (HNGC) has accepted an “Offer To Sell” from Kumpulan Tanjung Balai SB for purchase of approximately 60.57 acres of industrial land situated adjacent to current Hartalega’s Sepang NGC for RM158.3m. It is to be subdivided from a piece of leasehold land (126.07 acres) with lease tenure expiring on 9 Oct 2110. Conditions precedent for the purchase are that it is vendor’s responsibility to obtain i) State Authority’s consent for the transfer and ii) approval in connection with the sub-division of the said Land under a separate individual title. The Sale and Purchase Agreement (SPA) is targeted to be finalized on 21st Aug 2020 and proposed acquisition to be funded via internally generated funds and/or existing credit facilities

NGC 1.5 to add total new capacity of 19bn pieces p.a.

The land was chosen as NGC 1.5 site due to its strategic location adjacent to existing NGC plant with infrastructure and utility supply readily available. NGC 1.5 project is expected to have a total of 4 plants (48 lines) with estimated installed capacity of 19bn pcs p.a. Timeline of commissioning is yet to be confirmed pending due process and approvals. With the inclusion of NGC 2.0 and upon full completion by the year 2027, total installed capacity will be increased to 95bn pcs p.a. (table 1)

Positive on the transaction

We are positive on the proposed acquisition: i) it could hasten the group’s expansion plans in exploiting elevated global glove consumption, ii) provides greater economies of scale, and iii) provides greater value and earnings potential for Hartalega’s long-term growth. Our calculation implies that post-acquisition, Hartalega’s net cash position will reduced to RM321m (from net cash of RM478m as at 1QFY21).

Upgrade to BUY TP of RM21.70

No changes to our FY21-22F EPS estimates, pending completion of the acquisition and expansion plan timeline. Upgrade to BUY with unchanged TP of RM21.70 (based on 44x PER pegged on FY21 EPS) as price have fallen recently with current stock upside of 18.2%. Hartalega is expected to register FY21 supernormal earnings growth of 287% yoy on the back of strong demand from covid-19 pandemic. Additionally, we like Hartalega for its solid long-term prospects underpinned by capacity expansion, leadership position in nitrile glove with greater innovation and automation

Source: BIMB Securities Research - 11 Aug 2020