Result

• Hartalega reported a net profit of RM219.7mil for its 1QFY21 results. The quarterly net profit increased 90% QoQ and 133.6% YoY. Meanwhile, the quarterly revenue stood at RM920m, which soared 18.3% and 43.7% QoQ/YoY respectively.

• Broadly within forecasts. 1QFY21 result accounts for 18%/17% of our/consensus full year forecasts. However, we deem the result within our expectation as we understand that the Group lifted the selling price of its product mildly in 1st and 2nd quarter of FY2021 and plans to increase the selling price substantially (30% QoQ) in the following quarters to match with the prevailing market price.

Comments

• Impressive QoQ operational performance. The Group’s revenue surged strongly by 18.3% QoQ mainly due to higher ASP (+10% QoQ) and a moderate jump of sales volume (+7.4% QoQ) for the quarter. In turn, operating profit went up to RM268.5m (+54.4% QoQ) thanks to lower cost of sales (-8ppts). As a result, PBT jumped to RM272.8m (+98.3% QoQ). Notably, the subdued raw material cost and optimization of operating efficiency adopted by the group has paid off in which enhanced the overall operating margin to 29.2% from 19.0% a year ago.

• Exceptional YoY performance. The Group’s revenue elevated by 43.7% whilst PBT increased substantially by 124.2% in tandem with rising sales quantity (+38.1% YoY) for the quarter. Meanwhile, the operating profit and adjusted PBT bounced to RM268.5m/RM266.8m (+115%/+119%) respectively on the back of better utilization rate (100%) and lower energy cost.

• Anticipating stronger quarters ahead. The Group achieved a stunning performance in the latest quarter and we are confident that Hartalega is managed to achieve even better results in the coming quarters pursuant to intensifying global COVID-19 cases as well as a shortage of gloves supply around the world. Besides, we are seeing glove demand re emerges from Asia Pacific region as the second wave of COVID-19 is accelerating in Hong Kong, China, Japan, Singapore, Vietnam and Australia. Still, the number of people hospitalized in the US is hovering at the March’s peak level (see Figure 1).

• Setting up a huge capacity to cater for post pandemic “new normal”. Plant 6 has commissioned 8 out of 12 lines since early January despite MCO disruption which happened over the months. Moreover, the first line of Plant 7 to start commissioning towards Q4CY2020. In aggregate, available capacity will increase from the current 39 billion pcs per annum to 43.7 billion pcs per annum by FY2022. Moving forward, Next Generation Integrated Glove Manufacturing Complex 2.0 (expected to contribute in FY23) is projected to boost its total output from 43.7 billion pcs per annum to 76.0 billion pcs per annum in the future. It features higher operating efficiency such as production of more than 45,000 pieces per hour; 20% reduction in labour usage; fully digitalized factory floor; and a higher level of automation. These efforts have been initiated by the Group in order to cater for a new norm of demand, projected to be 12-15% glove consumption growth post-pandemic, soaring from the 8-10% pre-pandemic level.
   
• Adopting benchmark social compliance. Respectable social compliance policies held by the Group are aligned with international benchmarks on safeguarding child labour and young workers, workplace discrimination, as well as forced labour. The Group has implemented zero recruitment cost policy since April 2019. Best practices in likes of all workers keep their passports at personal lockable cabinets in their respective dorms, regulated working hours and overtime up to 104 hours (based on Malaysian laws), and regular social compliance audits based on international recognized standards.

Earnings Outlook/Revision

• We lift our FY21F & FY22F net profit estimates by 22.3% and 3.0% respectively to RM1526.4m (+251% YoY) and RM1218.8m (-20.2% YoY) by increasing the ASP.

Valuation & Recommendation

• Maintain BUY with a higher target price of RM21.62 (previous target price of RM18.80) following earnings upgrade. Our revised target price is now pegged at 54x CY21F P/E. Our valuation is in line with its +1SD above its 5- year mean P/E of 39x as we believe the Group is greatly benefited from higher profit margin in the 3rd and 4th quarters of FY2021. We peg our valuation to CY21 instead of FY21 considering the impact of earnings normalisation in FY22F after exceptional strong profit growth in FY21F pursuant to the pandemic. Our target price renders 10% return for capital gain as well as dividend against current share price.

Source: JF Apex Securities Research - 5 Aug 2020