• Overview. 2QFY21 revenue increased to RM1.3bn (46.3% qoq, 89.7% yoy), while net profit jumped to RM545m (148% qoq, 424.7% yoy). The stronger results were mainly due to higher sales volume (4% qoq, 27% yoy), increase in blended ASPs (>30%) and better production efficiency. Profit margin improved to 40.5% (+16.6 ppts qoq, +25.8 ppts yoy).

• Key highlights. Hartalega has current installed capacity of 41bn pcs p.a with plant utilization rate staying high at c.98% in reported quarter due to greater demand. It has fully commissioned all 12 lines of Plant 6 and targeting commissioning of 1 st line in Plant 7 towards 4Q of CY2020 which will raise its installed capacity to around 43.7bn pcs p.a. Beyond plant 7, Hartalega will expand through its plant NGC 1.5 (capacity: 19bn) and NGC 2.0 (capacity: 32.3bn). (refer table2). Estimated ASP is to increase by 40-50% in Dec20 qtr (or Hartalega’s 3QFY21) from previous guidance c.30%.

• Against estimates: Above. 1HFY21 net profit of RM764.7m (+286.3% yoy) made up 46% and 40% of our and consensus full year forecast. We deem this to be above expectations, owing to higher-than-expected increase in ASPs which will be reflected in upcoming quarters.

• Outlook. We expect Hartalega to record sequentially strong earnings in the next few quarters as they could still continue to surprise on the upside, given the continued surge in glove demand and ASPs on account of rising Covid-19 cases with no concrete vaccine timeline. Industry long-term demand postCovid-19 is expected to remain higher >c.12% p.a due to structural change in glove usage globally and greater hygiene awareness.

• Earnings revision. We increased our FY21-22 earnings forecast by 67%-71% to reflect expectations of higher ASPs moving forward following management’s revised guidance, paired with the increasing demand of gloves. We now expect profit margin to hold at 43%/41% in FY21/22 (from 30%/27% previously).

• Our call. Maintain BUY with TP raised to RM23.80, based on PER 30x (vs 44x previously) pegged on FY22 as we rolled over our valuation year. The lower implied PER is due to supernormal earnings and to reflect a moderation in earnings growth towards more sustainable levels beyond FY22. 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 - 28 Oct 2020