• Hartalega held a briefing on 15th Dec to provide an update and measures taken to address the issue of employees’ Covid-19 cases.
• Covid-19 positive rate is only 0.4% which is way below Top Glove and Kossan which we believe is due to company’s effective precautionary and safety measures taken.
• Currently, Hartalega has voluntarily closed 8 production lines for a month, equivalent to a capacity loss of less than 0.5% of total annual output. The impact is minimal as this constitutes <1% of our FY21 earnings forecast.
• Forecast unchanged but reduced our TP to RM15.70, implying lower PER of 20x (inline with sector 5-yrs historical avg forward PE) pegged on FY22 EPS. This is also reflective of the temperate landscape and sentiment on vaccine progress.

Hartalega Covid-19 positive rate of 0.4% well below some peers.

In a conference call on 15th Dec, Hartalega confirmed that out of a total 8.7k tested, only 35 workers were positive for Covid-19 and mostly are asymptomatic. This translates into a positive rate of only 0.4% which is way below Top Glove’s and Kossan’s rates. We attribute this to heightened implementation of Covid-19 preventive and control measures as well as safety measures above industry standards. Moving forward, in order to further enhance the effectiveness of existing measures, the company is looking into implementing scheduled RTK testing for all employees. Example, targeting 10% of workforce every week with the exercise to complete in 2.5 months and testing cycle to start immediately thereafter.

Minimal impact on earnings

Hartalega has taken precautionary actions by closing 8 production lines for a month, equivalent to a capacity loss of less than 0.5% of total annual output. Based on our calculation, the impact to our FY21f earnings would be minimal i.e. <1%. We make no changes to our earnings forecasts due to its insignificant impact at the moment.

Long-term demand outlook still promising

Earnings growth is expected to remain strong in next few quarters on the back of increase in ASP at least until 1H21 before gradually declining, in our view. Although ASP is unlikely to sustain at current levels in 2022, we still believe that long-term gloves demand remains promising at above pre-Covid level of 8-10% as the industry continuesto benefit from a structural change in higher gloves usage due to greater hygiene awareness

Maintain BUY, TP RM15.70

We have reduced our TP to RM15.70 (from RM23.80), implying lower PER of 20x (inline with sector 5-yrs historical avg forward PE) pegged on FY22 EPS. This is also reflective of the temperate landscape and sentiment on vaccine progress. We still like Hartalega for its solid longterm prospects and leadership position in nitrile gloves.

Source: BIMB Securities Research - 16 Dec 2020