Hartalega’s 1QFY21 revenue of RM920.1m (+18.3% QoQ, +43.7% YoY) brought core PATAMI to RM224.8m (+84.9% QoQ, +134% YoY). We deem the results to be in line as we expect stronger results in the coming quarters with improving ASPs. Revenue improved (+43.7% YoY) aided by the increase in sales volume (+38.5% YoY), and ASPs (+4% YoY). Currently, Hartalega is running at full capacity vs. 96% in 4QFY20) and 76% in 1QFY20. We increase FY21-22 earnings forecast by 39%/35% to reflect stronger ASPs moving forward on back of management’s revised guidance. Post earnings adjustments, our TP increase s to RM24.10 (from RM20.12). Our TP is based on FY21 EPS pegged to PE of 41x (1SD above 5 year mean). Maintain BUY.

Within expectations. 1QFY21 revenue of RM920.1m (+18.3% QoQ, +43.7% YoY) has brought core PATAMI to RM224.8m (+84.9% QoQ, +134% YoY). The results came in at 16% and 17% of ours and consensus’ expectations. We deem the results to be line as we expect stronger results in the coming quarters with higher ASPs.

Dividends. No dividends were declared.

QoQ. Revenue of RM920.1m improved by +18.3% thanks to higher sales volume (+7.4%) and ASPs (+9.8%). Utilization rate shot to full capacity from 96% (4QFY20). EBITDA increased by +46.3% to RM301.3m whilst EBITDA margins improved by 6.3ppts (to 32.8%). This was driven by lower raw material costs and upkeep expenses. Core PATAMI increased to RM224.8m (from RM121.6m) despite higher effective tax rates of 19% (4QFY20: 15.9%).

YoY. Revenue was boosted by +43.7% contributed by both increased in sales volume (+38.5%) and ASPs (+4%). Utilization rate improved to full capacity from the humble 76% back in 1QFY20. EBITDA was lifted by +94.8% while margin increased by 8.6ppts (from 24.2% to 32.8%) mainly due to lower raw material and energy costs, as well as the continuous cost control initiative to reduce operation costs. This was followed by a +134% increase in core PATAMI, with lower effective tax rates of 19% compared to 22.5% in 1QFY20.

Outlook. Hartalega will continue to focus on their capacity expansion plans. Its annual installed capacity is expected to increase from the current 39bn to 44bn pieces by FY22. Hartalega is also looking for a new land to bring forward capacity expansion. Furthermore, as we understand 1QFY21 adopted a less aggressive price increase due to the nature of Hartalega’s customers’ profile which is major distributors. Hence we expect a more upward “catch up” of ASPs in the coming quarters. Additionally, all spot orders (c.6% of total sales volume) have been fully taken up until Mar 2021.

Forecast. While we deem the results to be in line; we increase our FY21-22 earnings forecast by 39%/35% to reflect expectations of higher ASPs following management’s revised guidance, paired with the increasing demand of gloves globally (+20% YoY vs. normalised 8-10%). We introduce our FY23 figures.

Maintain BUY, TP: RM24.10. Post earnings adjustments, our TP increases to RM24.10 (from RM20.12). Our TP is based on FY21 EPS pegged to PE of 41x (1SD above 5 year mean). Maintain BUY.

Source: Hong Leong Investment Bank Research - 5 Aug 2020