We met up with Hartalega's (HART) management to get the latest development on the company and the status of its new product. We came away feeling less optimistic about HART’s outlook, due to uncertainties related to its future expansion plan post the NGC and the likely loss of some market share. As such, we have lowered our EPS forecasts for FY19-21 by 5.5-6.6%, and our TP to RM4.20 (from RM5.90), while downgrading the stock to a SELL (from HOLD).

Likely to Have Lost Market Share to Peers

We believe HART has lost some market share to its competitors, due to a wider selling price differential. The pricing strategy was set in anticipation of the launch of its new antimicrobial glove, as HART had assumed that customers would switch to its new product. However, as HART faced an unexpected delay in the launch of the new product, customers have opted for its competitors’ products instead. Although HART has reverted to its previous pricing strategy, its bottom line is likely to have been negatively impacted. The product price gap was due to HART's unwillingness to lower its selling price, despite the drop in raw material prices.

Time Is Ticking in the Need for a New Expansion Strategy

Although HART has laid out its NGC strategy, which is expected to be completed by mid-2021 from the previous guidance of early 2020, it has yet to reveal its expansion strategy post the completion of the NGC plant, which will add another 12bn pcs to its 30bn pcs capacity. HART has been generating positive earnings growth since FY16. To maintain the current earnings growth momentum, HART needs to announce its new expansion plan soon, in our view, as it usually takes 1.5 years to construct a new plant. Failure to do so would dampen investor sentiment.

Downgrade to SELL Due to Uncertainties

Due to uncertainties related to its future expansion plan post the NGC and the likely loss of some market share, we lower our FY19-21E EPS by 5.5- 6.6% and lower our FY20E PER target to 27x (mean) from 35x (+2SD). As a result, we lower our 12-month TP to RM4.20 and downgrade our call on HART to SELL from HOLD. Upside risks to our investment thesis include stronger sales performance of its new product, constraint in the supply of vinyl gloves and stronger-than-expected volume growth.

Source: Affin Hwang Research - 28 Mar 2019