1QFY22 core PATMI of RM2,270.1m (+96.5% QoQ, +909.8% YoY) was above expectations, making up 53.7% and 59.2% of ours and consensus expectations mainly due to higher-than-expected volumes. We raise our FY22/23/24 forecasts by 7.2%/1.2%/1.2%. Our TP rises from RM13.74 to RM14.05. Maintain BUY. At current price levels, Hartalega is trading close to pre-pandemic prices despite ASPs in 2HCY21 expected to average 2-3x pre-pandemic levels and Hartalega yielding 11.6%.

Above expectations. 1QFY22 core PATAMI of RM2,270.1m (+96.5% QoQ, +909.8% YoY) was above expectations, making up 53.7% and 59.2% of ours and consensus expectations respectively. Better than expected earnings was due to higher-than expected volumes, in spite of FMCO impact on operations. Core PATAMI was arrived at after adjusting for 10.6m forex losses.

Dividends. 1QFY22: None Declared. (1QFY21: None)

QoQ. In spite of FMCO restrictions on operations (glove manufacturers were instructed to operate at 60% workforce capacity at the start of June), sales volumes rose by ~50%. The better volumes were due to challenges in shipment availability and shutdown in production lines as a Covid-19 preventative measure in 4QFY21. In addition to higher volumes, higher ASPs QoQ (+13.0%) led to revenue rising by 69.7%. Core PATAMI nearly doubled to RM2,270.1m (+96.5%) in tandem with increased revenue.

YoY. Revenue rose 324.2% due to higher ASP (4.0x) and sales volume (+14.0%) due to stronger demand for disposable gloves during the Covid-19 pandemic. Core PATAMI rose +909.8% in tandem with higher sales.

Outlook. We expect earnings in 2QFY22 to be lower QoQ due to (i) lower ASPs (we expect ASPs to decrease by ~25-30% QoQ) and (ii) lower sales volumes from mandated 60% workforce capacity, which will result in lower utilisation rate. Hartalega guided that with 60% workforce capacity, their utilisation rate is expected to be between 70-75%.

Vaccination drive. Hartalega shared that their vaccination drive is coming along smoothly, with 90% of their employees having received the first dose. Hartalega expects all their employees to be fully vaccinated by end-Aug. We believe there may be a possibility that the Malaysian government permits Hartalega to operate with full capacity after all their employees are fully vaccinated, which would lift utilisation rates in the coming quarters.

Forecast. After the surprise in 1QFY22 earnings, we raise our FY22 net profit forecasts by 7.2%. Our FY23/24 forecasts are raised by 1.2%/1.2% after annual report updates to our model.

Maintain BUY, TP: RM14.05. After our earnings adjustments, our TP rises from RM13.74 to RM14.05. We value Hartalega using their pre-pandemic 5-year average PE multiple of 27.5x (CY15-19) tagged to a sustainable earnings in a post-supernormal earnings environment (FY24) summed with free cash flows generated in the meantime (both discounted back to PV (Figure #2). While ASPs are expected to decrease QoQ, we reckon the negative sentiment is overblown. At current price levels, Hartalega is trading close to pre-pandemic prices despite ASPs in 2HCY21 expected to average 2- 3x pre-pandemic levels and Hartalega expected to yield 11.6%.

Source: Hong Leong Investment Bank Research - 4 Aug 2021