Hartalega held a briefing to address the labour concerns highlighted by activists recently. Their efforts include extensive remediation payments to workers who had paid recruitment fees to agents and lowering the weekly work week to 60 hours. We take this opportunity to factor in lower utilisation rate from the impact of MCO 3.0 on Hartalega’s operations. We lower our FY22 forecasts by 4.9% to account for lower sales volume. We maintain BUY with a slightly lower TP of RM13.85 after our earnings adjustment.

Hartalega held a briefing to address the labour concerns highlighted by activists recently.

To recap, in May-21 a letter was sent to the US Customs and Border Protection (CBP) by an activist to investigate Hartalega and Supermax for alleged forced labour issues. At this juncture, it is unclear whether there is an active ongoing investigation, as Hartalega shared that they have yet to hear from the CBP. Nevertheless, Hartalega has outlined numerous steps taken to ensure their operations are free from forced labour, all of which had begun before the complaint was filed.

Remediation payments. The process of interviewing workers and engaging a third party consultant had begun in Dec-19. As of 4 June 2021, Hartalega has completed its remediation payment of RM41m to current workers who had paid recruitment fees to employment agents during the recruitment process. Hartalega shared that they expect to pay a further RM8-12m to former workers which include absconded, repatriated and those on leave “stranded” in their home countries.

Changes in labour practices. Despite issues with hiring local workers (Hartalega shared that local workers have a high turnover rate and 8-10% of the time they are absent from work), Hartalega will continue to try to increase their number of local workers as it has become difficult to hire foreign workers during the Covid -19 pandemic. Part of their efforts to attract local workers is to move to a 60 hour work week (72 hours is the industry standard at the moment).

ASP, sales volume and raw material price outlook. Hartalega expects ASPs to be slightly higher QoQ in 1QFY22 (2QCY21) but fall ~24% QoQ in 2QFY22 (3QCY22) in line with market prices. Hartalega attributed this to increased competition in the Europe market from a competitor shifting sales from the US to Europe as well as the improving Covid-19 situation in selected countries. In line with declining ASPs, Hartalega expects raw material prices to decline in 2HCY21. With regards to sales volumes, Hartalega guided that current restrictions on the manufacturing industry to operate at 60% workforce will translate to 70% utilisation rate for the duration of the ongoing FMCO.

Forecast. We take this opportunity to factor in lower utilisation rate from the impact of FMCO on Hartalega’s operations. We lower our FY22 forecasts by 4.9% to account for lower sales volume.

Maintain BUY, TP: RM13.85. We maintain BUY with a slightly lower TP of RM13.85 (from RM13.90) after our earnings adjustment. 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 - 15 Jun 2021