Hartalega’s entered into a SPA to acquire 95.1 acres of land in Banting from Bonus Essential Sdn Bhd for RM263m. The deal is expected to be completed by 2H22. We are positive on the acquisition. The site which will be NGC2.0 will hold 7 plants with a total of 82 lines, that would produce c.32bn pieces of gloves per annum (+73.9% of Hartalega’s total capacity). Construction target is set to begin in 2021, while targeted commissioning of first line would be in 2022. Earnings growth is expected to come in 2023. Our proforma net gearing ratio is expected to increase to 12.6% post acquisition, from 2% in 3QFY20. Maintain forecasts. We reiterate our HOLD call with unchanged TP of RM5.99. Our TP is derived from FY20 EPS and pegged to PE of 42x.

NEWSBREAK

Hartalega announced it entered into a Sale and Purchase Agreement (SPA) with Bonus Essential Sdn Bhd (BESB) to acquire 95.1 acres of land for a total cash consideration of RM263m. BESB, a wholly subsidiary of Limbungan Emas Sdn Bhd deals with property investment and property development. The deal is expected to be completed by 2H22 subject to conditions as stipulated in the SPA.

The land is located in Banting, under Mukim Tanjong Duabelas, Daerah Kuala Langat, Selangor. The 95.1 acres of land is to be subdivided from a piece of freehold land of 201.1 acres. The land which is of agricultural title would be converted to heavy industrial title by BESB. Apart from that, main infrastructures which includes earth filing works, access road, two bridges and other utilities are to be completed by BESB.

HLIB’s VIEW

Positive on the news. We are positive on the acquisition. This acquisition gives light to Hartalega’s earnings growth post Next Generation Integrated Glove Manufacturing Complex (NGC) in Sepang (scheduled to be completed in 2021). The acquisition will enable Hartalega to progressively expand its capacity to meet the rising global glove demand. The site which will be NGC2.0 is strategically located near to its existing NGC in Sepang. It is within close proximity to the West Coast Expressway interchange in Banting, surrounded by nearby rapid industrial and housing development as well as flat topography. The land acquisition is scheduled for completion by 2H22.

NGC2.0. The new complex will hold 7 plants with a total of 82 lines, that would produce approximately 32bn pieces of gloves per annum (+73.9% to Hartalega’s total capacity). Construction target is set to begin in 2021, while the targeted commissioning of the first line would be in 2022. Full completion of NGC2.0 is expected to be in 2029. That being said, earnings growth is expected to come in earliest in 2023. We also expect the margins to be similar to NGC Sepang, due to similar number of lines with similar line speed.

Gearing. Hartalega intends to fund the proposed acquisition via internally generated funds and/or bank borrowings. Our proforma net gearing ratio is expected to increase to 12.6% post acquisition (from 2% as at 3QFY20).

Forecast. Maintain. The earnings contributions from NGC2.0 is beyond our forecast horizon at this juncture.

Maintain HOLD, TP: RM5.99. We maintain our HOLD call with unchanged TP of RM5.99. Our TP is derived from FY20 EPS and pegged to PE of 42x (+1.5SD).

Source: Hong Leong Investment Bank Research - 26 Mar 2020