• Hartalega (HART) reported a decent set of 1QFY21 results. PATAMI jumped 90% qoq or 134% yoy to RM219.7m, supported by a higher sales volume and ASP.
• Despite PATAMI comprising only 19% and 17% of our previous and the consensus forecast, we deem the results as above expectations and believe that earnings will be stronger in the quarters ahead.
• We maintain our BUY rating on HART with a higher 12-month TP of RM28.80, based on an unchanged CY21E PER of 52x (+1SD its 5-year average)

Earnings driven by improvement in both volume and ASP

Although revenue increased by only 18% qoq, PATAMI jumped by 90% qoq in 1QFY21. The increase was mainly due to higher operating leverage as the price increase lifted the EBITDA margin to 33.4% from 22.1% in 4QFY20. The ASP increase during the quarter was relatively minimal, at around 5% qoq, as prices for shipments had been locked in before the global outbreak of COVID-19. Apart from the hike in ASPs, HART was able to increase the sales volume by 7.4% qoq, by deferring maintenance work, which resulted in a utilisation rate of close to 100%. We believe that the margin trend is sustainable, as current demand-supply dynamics favour an ASP uptrend.

Stronger quarters ahead

Unsurprisingly, management is guiding for more aggressive price hikes of at least 30% qoq for the next 2 quarters, as it believes that HART’s ASPs are still significantly behind that of peers. Given strong demand for spot orders, HART is only locking in orders until Mar’21, as it believes that there is still room for spot order prices to trend higher in the coming months. Management is not too concerned about the potential shortage of nitrile (raw material), as the current lines are interchangeable and can produce latex gloves if needed. Given the acute shortage of medical gloves, the margin difference between nitrile and latex is insignificant. Hence, we believe this is unlikely to impact HART’s profitability.

Reiterate BUY with a higher TP of RM28.80

As we are comfortable with management’s ASP guidance, we have raised our EPS forecasts for FY21-23 by 33%-67%. As a result, we have also increased our TP to RM28.80 (from RM17.50) based on an unchanged 52x CY21E PER. We maintain our BUY call, as we believe that there could be more upside to our forecasts, as the spike in demand can still push ASPs higher given that most distributors have limited inventory. HART remains one of our sector favourites and top country picks.

Source: Affin Hwang Research - 4 Aug 2020