Result

• Hartalega reported a net profit of RM115.7mil for its 4QFY20 results, bringing FY2020 net profit to RM434.8m. The quarterly net profit decreased 4.5% QoQ but increased 26.6% YoY. Meanwhile, the quarterly revenue stood at RM777.9m, which fell 2.3% QoQ while up 13.7% YoY.

• Matching consensus but well below in-house projection. Overall, 12MFY20 net profit of RM434.9m accounts for 95.4%/87.0% of ours/market full-year estimates. However, FY2020 revenue achieved 99% of our full year forecast of RM3062.0m.

• Third interim dividend declared. The group has declared a third single-tier dividend of 2.05 sen per share for FY20, adding total dividend declared for the financial year to 5.65 sen per share.

Comments

• Solid QoQ operational performance. The Group’s revenue slid 2.3% QoQ mainly due to lower ASP (-2% QoQ) for the quarter. Despite lower sales recorded, operating profit went up to RM173.9m (+12.7%) thanks to lower operating expenses. However, foreign exchange loss of RM36.5m resulted in decrease of PBT by 13.8% to RM137.6m.

• Superb YoY performance. The Group’s revenue elevated by 13.7% whilst PBT increased substantially by 21.0% in tandem with boosted sales quantity (+18.3%) for the quarter. Meanwhile, the operating profit and adjusted PBT bounced to RM173.9m/RM152.2m (+53.1%/+32.1%) respectively on the back of lower raw material and energy cost.

• Anticipating stronger year ahead amid tepid FY2020. Growth in revenue for 12MFY2020 was mild, +3.4% from the strong base. The marginally improvement of operating profit of RM596m (+4.1%) was largely dragged by the poor performance in 1QFY2020. To make matter worse, exceptional other operating expense (+183%) causes net profit sank to RM435.8m (-4.5%). Moving forward, we believe the demand exceeds the capacity expansion of glove manufactures throughout the year. The demand for gloves will likely come from the U.S, UK, Brazil and Russia as the COVID-19 cases is accelerating.
• Concrete future plan in place. The group reached a Sales and Purchase agreement with a company to acquire a land with approximately 95 acres as the NGC 2.0 plant in Banting. The amount of acquisition was RM263m. We are optimistic on the deal as it serves a long-term growth plan for the group and hopefully, NGC 2.0 will equip them with more leading and advanced technology in the future, resulting an improvement to the group’s prevailing downtrend of profit margins.
• A high ASP is unsustainable. The resumptions of glove productions in Thailand and China (2nd and 3rd exporters in the world) are taking place after the easing of COVID-19 in both countries. The leading glove player in Thailand – Sri Trang Gloves plans to ramp up annual production capacity significantly to 32 billion (+18% YoY) pieces by the end of CY2020 from 27 billion pieces. Moreover, we deem the US will exempt tariffs for Personal Protective Equipment (PPE) exports from China responding to COVID-19. Therefore, the resumption of gloves supply in the coming months will offset the recent average selling price (ASP) spike due to supply shortages.
• Expecting a sharp decline in the USD. The unprecedented amount of stimulus package from the Unites States totaling USD 5 trillion thus far, has created massive supplies of dollar to the global economy. We deem the aftermath of the stimulus package will dilute USD significantly in the coming years as we witnessed a sharp depreciation of USD against MYR (-21.2%) during 2009 after the 2008 financial crisis. It is likely to happen again as the current size of stimulus package is much bigger. As a result, depreciation of USD would dampen the buying power from its clientele and render negative impact to local glove exporters.

Earnings Outlook/Revision

• We lift our FY21F net profit by 18.9% to RM575.7m (+32.4% yoy) by increasing the utilization rate and also introduce FY22F net earnings forecast of RM534.7m (-7.1% yoy).

Valuation & Recommendation

• Maintain HOLD with a higher target price of RM9.10 (previous target price of RM6.20) following higher P/E applied. Our revised target price is now pegged at 53x FY21F P/E of (from 42x previously). Our valuation is in line with its +2SD above its 5-year mean P/E of 36x as we believe the Group is greatly benefited from current strong demand stemming from the pandemic. However, we opine that current valuation of the stock looks pricey and has factored in all the positives.

Source: JF Apex Securities Research - 19 May 2020