• Hartalega reported a strong set of results, with 9MFY21 PATAMI of RM1,766m (+453% yoy) above our and consensus expectations
• We are expecting stronger quarters ahead, as management has guided for ASPs for the subsequent 2 quarters to increase by at least 40% QoQ
• Although we have raised our FY21-23E EPS forecasts by 17-58%, we have cut our TP to RM17.00 as we peg the valuation to a lower PER at 23.5x (3-year mean pre-Covid-19), while keeping our BUY call.

Guiding for ASP to Increase by at Least 40% QoQ

The strong earnings growth of 84% QoQ for 3QFY21 to RM1,002m was due to higher exposure to the spot market and also the >30% QoQ increase in ASP for its normal deliveries, which resulted in blended ASPs increasing by more than 60% QoQ. Despite the strong performance, management is guiding for ASPs to rise by at least 40% in the subsequent 2 quarters (4QFY21E and 1QFY22E), as demand for rubber gloves remain robust. We are not concerned over the generally flat sales volume QoQ, as overall utilisation remained healthy at 95% in 3QFY21. It is challenging to sustain utilisation at >95% for a prolonged period due to the need for regular maintenance.

Still on the Way to the Peak

We believe that management’s optimistic guidance is backed by strong demand for gloves, supported by the record number of new Covid-19 cases in recent weeks. Although a few developed countries have started to roll out Covid-19 vaccines, this is mainly for essential workers and high-risk groups. As such, we expect major developed countries to only achieve herd immunity by end-3Q21. However, we are not expecting a sharp drop in ASPs yet, as demand will likely remain robust, as distributors will need to restock their inventory, and there will be demand from other countries that have yet to achieve herd immunity. We are forecasting ASPs to decline by 25% YoY in 2022.

Reiterate BUY But With a Lower TP of RM17.00

We raised our FY21E-23E EPS forecasts by 16.5-58.0% to factor in the stronger ASP guidance. However, we have cut our TP to RM17.00 as we peg the valuation to a lower CY22E PER of 23.5x (from CY22E PER of 34.1x, at +1 stdev) based on its 3-year mean, on weaker investor sentiment over concerns of earnings sustainability. We maintain our BUY call. We believe that there is upside risk to our forecasts if the current Covid-19 situation worsens, as the current shortage will continue to drive ASPs higher. Downside risks include shortage of raw material and labour.

Source: Affin Hwang Research - 26 Jan 2021