Hartalega’s 4QFY20 core PATAMI of RM123.7m (+6.8% QoQ, +38.1% YoY) brought FY20 sum to RM438.9m (-3.9% YoY). The results came above our expectations due to improved sales volume. Revenue improved (+3.4% YoY) thanks to increase in sales volume (+8.8% YoY), slightly offset by lower ASP (- 4.0% YoY). FY20’s utilization rate remained unchanged at 88%. We increase FY21-22 earnings forecast by 43%-38% to reflect stronger ASPs moving forward on stronger demand resulting from Covid-19. We also roll forward our valuation to FY21 and apply a PE multiple of 46.5x (+2SD) from 42x (+1.5SD), increasing our TP from RM10.08 from RM5.99. Upgrade to BUY.

Above expectations. 4QFY20 core PATAMI of RM123.7m (+6.8% QoQ, +38.1% YoY) brought the FY20 sum to RM438.9m (-3.9% YoY). The results came in slightly above our expectations at 106% but within consensus at 96%. The deviation was due to higher than expected revenue from improved sales volume.

Dividends. Declared third interim dividend of 2.05 sen per share going ex on 11th June (4QFY19: 2.0 Sen).

QoQ. Revenue of RM777.9m reduced by -2.3% due to lower ASP (-2.1%) while sales volume remains unchanged. Utilization rate remained at 96%. However, EBITDA improved by +10.8% to RM206.0m whilst EBITDA margins improved by 3.2ppts (to 26.5%). This was mainly attributed to lower raw material and energy costs, along with best cost controls. Core PATAMI increased to RM123.7m (from RM115.8m) with lower effective tax rates of 15.9% (3QFY20: 23.8%).

YoY. Revenue was lifted by +13.7% attributed to increase in sales volume (+18.3%), however ASP was lower (-4.2%) that was in tandem with lower material costs. Utilization rate improved to 96% (from 84% in 4QFY19). EBITDA boosted by 43.9%, while its margin increased by 5.6ppts (from 20.9% to 26.5%) mainly due to lower raw material and energy costs. This followed by a +38.1% increase in Core PATAMI, with lower effective tax rates of 15.9% compared to 19.6% in 4QFY19.

FY20. Revenue increased slightly (+3.4% YoY) thanks to higher sales volume (+8.8%) but was slightly offset but by lower ASP (-4.0%) in tandem with lower raw material costs. The average utilization rate remained steady at 88%. EBITDA improvement (+3,9% YoY), mirrored topline. However, core PATAMI of RM438.9m showed a decline by -3.9% YoY as a result of higher depreciation and amortisation costs (+20.7%) and higher effective tax rates of 21.7% (FY19: 17.3%).

Outlook. Hartalega will remain focused on improving efficiencies and its NGC capacity expansion plans. To date, Plant 6 has commissioned 4 out of 12 lines since early January 2020. Construction of Plant 7 has commenced with targeted commission of first line by end of CY20. Plant 6 and Plant 7 will house an annual capacity of 4.7bn and 2.4bn pieces once completed. With the progressive commissioning of Plant 6 and Plant 7, Hartalega’s annual installed capacity is expected to increase from the current 38.1bn to 43.7bn pieces by FY22. Back in March, Hartalega has entered into a SPA for a land acquisition in Kuala Langat, in view to develop a new complex, NGC2.0. It will hold 7 plants with 82 lines that would produce c. 32bn pieces of gloves per annum. While it is expected to be fully completed in 2029, initial earnings contribution can be expected earliest in 2023. This gives us some light on Hartalega’s earnings growth post NGC Sepang (scheduled for completion in 2021).

Forecast. We increase FY21-22 earnings forecast by 43%-38% to reflect expectations of improving utilization and ASPs from the increase in global demand for gloves due to Covid-19 affect. We foresee that Hartalega’s ASP to increase at the same quantum of other glove companies and we expect utilisation rate to remain above 90% until FY21.

Upgrade to BUY, TP: RM10.08. We take the opportunity to roll forward our valuation horizon to FY21 on a PE multiple of 46.5x (+2SD above 5-year mean) from 42x (+1.5SD) previously. All in, our TP increases to RM10.08 (from RM5.99). Upgrade to BUY.

Source: Hong Leong Investment Bank Research - 25 May 2020