Highlights

In its exchange filing, Hartalega announced that its whollyowned subsidiary, Hartalega NGC SB has entered into an agreement with Kumpulan Tanjung Balai SB to acquire 3 plots of land for a total cash consideration of RM97.0m.

The total land areas measured up to 120 hectares is located at Mukim Labu, Daerah Sepang, Selangor.

The objective of the land purchase is to expand its production capacities by erecting 6 manufacturing facilities leveraging on new in-house developed technologies. They will house 72 production lines (PL) which was accorded the EPP under ETP due to its high economic impact.

The expansion will be spread over two 4-year phases and employ about 5k workers. 1. 2013 - 2017: 42 PL with total annual capacity of 16.5bn. 2. 2018 - 2021: 30 PL with total annual capacity of 12.0bn.

The land development also includes administration office, centre of excellence, learning and development centre, sports and recreation centre and staff’s accommodation.

The whole project was allocated with a budget of RM1.9bn.

The construction layout is subject to the approvals by relevant local authorities.

Financial Impact

The price tag of RM97.0m which was derived based on willing-buyer willing-seller basis will be funded by internally generated funds and bank borrowings, without specifying the ratio. We are not too concern as Hartalega ended FY13 with a net cash position of RM170.3m.

Comments

• Additional capacity from NGC is expected to commence production only in FY15.
• Emphasizes on human capital as the operations will be highly dependent on the skilled workforce. As mitigation measure, Hartalega has pre-employed factory workers now at 3.9k compared to a year ago at 2.9k.

Risks

• Delays in capacity expansion plans.
• Surge in nitrile latex prices.
• Shift in demand to natural latex gloves from nitrile gloves, if prices of natural latex fall significantly below nitrile latex.
• Depreciation of USD vs. MYR.

Forecasts

Unchanged as we have factored this expansion based on previous guidance.

Rating

HOLD TP: RM6.37

Positives – Leader in nitrile glove market; highest ROE and net profit margins; most efficient and profitable glove maker. In the event of a price war, Hartalega’s earnings will be the least affected, shielded by its high profit margins.

Negatives – Possibility of increased competition in nitrile glove market.

Valuation

Since our upgrade in early May, share price has performed well, rallied by 17.4% from RM5.45 to reach all time high of RM6.40 and slightly topped our TP.

As such, considering that there is limited upside, we downgrade our call on the equity from BUY to HOLD based on unchanged TP of RM6.37 derived based on 17.5x CY14 EPS. At this juncture, we believe that it is fairly valued.

Source: Hong Leong Investment Bank Research - 13 Jun 2013