In anticipation of a weak 4QFY19 results in May and a slowdown in NGC expansion plans, HARTA’s market capitalisation plunged 14.9% or RM2.71bn to RM4.63 post its 3QFY19 results due to: 1) Excessive valuations; 2) Waning USD effect; 3) Normalising demand; 4) Swelling capacities and intensified competition coupled with 5) The delay in FDA approval for its new Anti Microbial Gloves (AMG) to Dec-19 (vs Jun-19 previously). In our view, those risks are overblown as value has emerged with the negatives appearing to be priced in and valuations become more reasonable at 27x FY20 P/E, supported by the more superior ROE and net margins (vs. its peers). Technically, HARTA is poised for a downtrend line breakout to retest RM4.80-5.00 territory, after a brief consolidation.

Slowdown in expansion plans. HARTA’s Next Generation Complex (NGC) is expected to cement the group’s position as the premier nitrile glove maker in the world, reinforcing its competitive advantages with better efficiency and sufficient capacity growth. At this juncture, HARTA is rescheduling the commissioning of the remaining 6 lines in Plant 5 (by 4Q19)/ Plant 6 (by 2020) and Plant 7 (by 2021) in an effort to moderate the pressures of overcapacity. Upon full commissioning, the expansions will bring its total capacity to ~44bn pieces in 2021 from 30bn pieces as at end Dec 2018.

The FDA approval on AMG. Apart from the NGC strategy, another significant game changer lies in the reception of the group’s breakthrough AMG gloves (i.e: Anti Microbial Glove), which could sustain HARTA’s strong double-digit margins and leading position in the nitrile glove segment over the long run. The group is currently working to secure the Federal Drug Administration (FDA) approval to enter the US market, which is expected to be obtained by end-Dec 19.

Values revisit after a 25% share price rout YTD. In the short term, HARTA could still trap in consolidation mode in view of the negative company’s prospects and share prices continue to hover below the downtrend line near RM4.84 and multiple major SMAs. Nevertheless, in our view, those risks are overblown (following the larger-than expected prices slump YTD and from 52W high compared to its peers) as value has emerged with the negatives appearing to be priced in and valuations become more reasonable at 27x FY20 P/E, supported by the more superior ROE and net margins (vs. its peers).

The premier nitrile gloves producer in the world. Overall, we continue to like HARTA for the management’s foresight and execution, its visible capacity expansion to become the premier nitrile gloves producer in the world, product innovation and superior operating efficiencies (with highest ROE and net profit margins). Hence, in the event of a price war, HARTA is on a stronger footing to withstand higher raw material costs and adverse forex fluctuations as its higher margins affords the Group more leeway in absorbing margin squeezes.

Poised for a downtrend line breakout after a brief consolidation. Downside risks are limited as MACD histograms are on the mend, coupled with deeply oversold slow stochastic and RSI. Once this pattern ends, we expect prices to stage a breakout above immediate resistance at RM4.75 (20D SMA), followed by the downtrend line near RM4.84 and the RM5.03 (upper Bollinger band) levels, before reaching our LT objective at RM5.13 (50D SMA). Key supports are situated at RM4.50/4.40 levels. Cut loss at RM4.38.

Source: Hong Leong Investment Bank Research - 6 March 2019