Hartalega reported a relatively decent set of results, 9MFY20E PATAMI of RM319m (-12.5% yoy) is within both ours and consensus expectation, delivering 74% and 71% of FY20 forecast respectively. Although EBITDA margin per glove remained flat qoq, overall sales volume continued to grow in 3QFY20 (by 13% qoq), spurred by stronger demand from the US market. As utilisation rate for the quarter has risen to 96%, we believe that HART would have the flexibility to increase selling price to meet the recent surge in demand. As such, we raise our TP to RM6.40 on the back of an earnings upgrade of 0.2%-3.5% over the next 3 years, but keep our HOLD call unchanged.

Stronger Demand From North America Market

Overall sales volume for 3QFY20 grew 13% qoq and 17% yoy, supported by stronger demand from the North America market (mainly US), as sales to the region increased by 18% qoq and 29% yoy. We believe that the higher demand from the US is due to the new tariff (since Sep19) imposed on medical gloves imported from China into the US. Due to the higher output, utilisation rates have improved from 85% in 2QFY20 to 96% in the current quarter. The overall EBITDA per glove remained relatively stable qoq, indicating that competition remains rationale, which is positive for the both the sector and HART.

Beneficiary of the 2019-nCov Outbreak

Our recent checks suggest that there is an uptick in demand for rubber gloves due to the current coronavirus outbreak. HART’s management has also indicated that they are likely to continue to operate at above 90% utilisation rate and will also be prioritising some orders. We believe that since HART is already operating beyond its optimal utilisation levels, HART would have the flexibility to raise their selling prices to enhance their margins, as the current EBITDA per ‘000 glove around RM22.90 is still below the average of FY19 at RM23.20. As such, we are revising up our margin forecast for the next few quarters.

Maintain HOLD With a Higher TP of RM6.40

We have raised our FY20-22E by 0.2%-3.5% to factor in the recent surge in demand for rubber glove due to the coronavirus outbreak. We have also raised our TP to RM6.40 (from RM5.20), based on a higher CY20E target PE of 42x (+1SD) from 35x, due to the improved outlook. The key risk to our call would be stronger than expected growth in demand. Other risks include a sudden sharp movement of the US$ against the RM or a sharp drop in raw-material prices.

Source: Affin Hwang Research - 12 Feb 2020