FY21’s core PATAMI of RM2,898.2m (YoY: +564.9%) was below ours but in line with consensus expectations at 89.6% and 95.8% respectively. The shortfall was due to lesser sales volumes from temporary shutdown in production from Covid-19 outbreak as well as logistics issues. We lower our FY22/23 forecasts by 7.1%/2.2% after factoring in lower sales volumes. After rolling over our valuation year, adjusting for forecasts and net cash item, our TP falls from RM15.80 to RM13.90.

Below expectations. 4QFY21 core PATAMI of RM1,155.3m (QoQ: +19.0%, YoY: +857.4%) brought FY21 core PATAMI to RM2,898.2m (YoY: +564.9%) which was below ours but in line with consensus expectations at 89.6% and 95.8% respectively. The weaker-than-expected earnings was due to lesser sales volumes from temporary shutdown in production as a preventative measure from Covid-19 as well as logistics issues during 4Q21. Core PATAMI was arrived at after adjusting for RM12.8m forex losses.

Dividends. Declared third interim dividend of 17.7 sen (going ex on 21 May 2021) brought FY21 sum to 31.2 sen. Note that Hartalega typically announces a final dividend for the year in Aug/Sep. As management have guided they will payout a minimum of 60% of earnings, this equates to a minimum of ~52.0 sen per share for FY21. DPS: 4Q20: 2.1 sen, FY20: 7.7 sen.

QoQ. Despite sales volume shrinking by -29% along with utilisation rate falling from 95% to 64%, revenue rose 8.0%. This was due to ASP rising by ~50%. Lower sales volume was due to Covid-19 disruptions on operations and logistical issues (lack of shipment availability caused by global container shortages). Overall, higher ASPs were able to offset higher raw material price, resulting in core PATAMI rising by +19.0%.

YoY. Sales volume shrank -20.9% due to similar reasons mentioned above. Despite this, revenue was up by +195.5% from ASP increase of ~275%. In addition to higher revenue, lower utilities and upkeep expenses led Core PATAMI to surge +857.4%.

YTD. Revenue rose +129.0% due to higher ASP (~2x) and sales volumes (+12.1%). Core PATAMI was up by +564.9% from higher revenue and better production efficiency.

Outlook. As expected, Hartalega will continue to pursue capacity expansion. To date, the group have commissioned 6 out of 10 lines in Plant 7. Upon full commissioning, Plant 7 will have an annual capacity of 2.7bn, which would take their annual capacity to 44bn. In the longer term, Hartalega intends to increase their annual capacity to 63bn pieces per annum over the next 2-3 years. While Hartalega reported ASP increase of 50% in 4Q21, they still expect 1Q22 ASPs to be slightly higher QoQ, following that, they expect ASPs to gradually decline in 2Q22. We reckon higher ASPs going into 1Q22 is likely, given Hartalega’s guidance is in line with market prices.

Forecast. While Hartalega’s guided ASPs are in line with our in house view, we lower our FY22/23 forecasts by 7.1%/2.2% after factoring in lower sales volumes. Hartalega has guided that Covid-19 disruptions that affected operations in 1Q21 is behind them, however, management shared that they still face logistical issues due to chronic lack of containers globally.

Maintain BUY, TP: RM13.90. After rolling over our valuation year, adjusting for forecasts and net cash balance, our TP falls from RM15.80 to RM13.90. 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 #2). Maintain BUY.

Source: Hong Leong Investment Bank Research - 5 May 2021