Hartalega (HART) reported a relatively weak set of results. FY20 PATAMI of RM434.8m (-4.7% yoy) was below both ours and consensus expectation, delivering only 91% and 94% of the respective forecast. The weaker than expected performance was due to losses of RM41m on its mark-to-market derivates contract in 4QFY20. Excluding the losses, overall performance is within our expectation. As such, we are keeping our TP unchanged at RM10.20, and reiterate our BUY call, as we are expecting stronger glove demand ahead due to the COVID-19 outbreak.

Utilisation Rate Remain Above 95%

Due to the lack of new capacity in 4QFY20, overall sales volume growth was flattish qoq, but overall utilisation rate remained at 96% for the quarter. Due to the strong demand arising from COVID-19, HART similar to the other glove manufacturers would have the flexibility to raise average selling prices. Although we are expecting a 40-60% price hike in FY21E, we believe that HART’s utilisation would still sustain at above 95%, as the overall 10-12% growth in sector capacity in 2020 is not sufficient to meet current demand. As such, we are expecting stronger earnings ahead.

Limited Capacity Growth for 2020/21

In order to reduce the risk of an overcapacity post the peak demand from COVID-19, we believe that manufacturers will need to be rational and stick with their existing expansion plan. Given that HART’s NGC 2.0 will only be commissioned by 2022, we are expecting its capacity to grow by less than 10%/annum over the next 2 years, as HART is working to complete the final 2 plants (6&7) in its current NGC. 4 out of 12 lines in Plant 6 was just recently commissioned, with the remaining lines to be completed by end of the year. Plant 7 is only likely to start contributing in FY22.

Reiterate BUY With An Unchanged TP of RM10.20

We have tweaked our FY21-22E earnings to factor in the recent results performance but maintaining our TP of RM10.20, based on a CY21E target PE of 52x. We are expecting stronger earnings ahead due to the surge in demand which will allow manufacturers like HART to raise their selling price. As such we are reiterating our BUY call. However, Top Glove and Kossan is still our top pick for the sector. The key risk to our call is a sudden sharp movement of the US$ against the RM or a sharp increase in raw-material prices.

Source: Affin Hwang Research - 22 May 2020