Hartalega have entered into a sales and purchase agreement for ~250 acres in Bukit Kayu Hitam, Kedah for a total cash consideration of RM228.7m with an option to purchase a further ~130 acres in the same location. We are positive on this news as it fits into Hartalega’s long-term strategy for capacity expansion to 95 bn pieces p.a. by CY27 (from ~43bn pieces p.a currently). Proforma net cash will reduce from RM1,785.3m (as of end 3QFY21) to RM1,557.7m. We maintain BUY with an unchanged TP of RM15.80.

NEWSBREAK

Hartalega has entered into a sales and purchase agreement with Northern Gateway Free Zone Sdn. Bhd. (subsidiary of MoF) to acquire ~250 acres of land in Bukit Kayu Hitam, Kedah for a total cash consideration of RM228.7m. This equates to RM21psf. Concurrently, both parties have also signed an agreement for the option to purchase a further ~130 acres in the same location.

HLIB’s VIEW

We are positive on this news as it fits into Hartalega’s long-term strategy for capacity expansion. Note that Hartalega intends to more than double its existing capacity to 95bn pieces p.a. by CY27 (from ~43bn pieces p.a. currently). The first plant in this location is set to be completed by CY24. While no industrial land close to Bukit Kayu Hitam is available as a direct comparison for sale, industrial land in Kedah in more prime locations (closer to Kulim) on PropertyGuru and Iproperty is selling for between RM30-40 psf. As Bukit Kayu Hitam is located in a less prime location further north, we reckon RM21psf seems like a fair price.

Forecast. As this acquisition has no material impact to Hartalega’s FY21-22earnings, we keep forecasts unchanged. Proforma net cash will reduce from RM1,785.3m (as of end 3QFY21) to RM1,557.7m.

Maintain BUY, TP: RM15.80. We maintain BUY with an unchanged TP of RM15.80. We value Hartalega using with their pre-pandemic 5-year average PE multiple of 27.5x (CY15-19) tagged to sustainable earnings in a post-supernormal earnings environment (FY24) summed with free cash flows generated during the boom period (both discounted back to PV) (Figure #1).

Source: Hong Leong Investment Bank Research - 11 Mar 2021