Result

• Hartalega reported a net profit of RM544.9mil for its 2QFY21 results. As expected, the quarterly net profit surged 148% QoQ and 425% YoY. Meanwhile, the quarterly revenue stood at RM1346.0m, which soared 46.7% QoQ and 89.7% YoY.

• Broadly within forecasts. 6MFY21 result accounts for 50%/38% of our/consensus full year forecasts. We deem the result within expectations as higher ASP will lead to better margin in the coming quarters and hence meeting consensus full year net earnings estimate.

Comments

• Stunning QoQ operational performance. The Group’s revenue surged strongly by 46.3% QoQ mainly due to higher ASP (+40% QoQ) amid a lenient jump of sales volume (+4.4% QoQ) for the quarter. In turn, operating profit went up to RM676.9m (+152.1% QoQ) thanks to stagnant cost of sales. As a result, PBT jumped to RM683m (+150.4% QoQ). Notably, the Group’s adoption of business process optimization and operating efficiency have paid off resulted in higher operating margin, 50.3% during this quarter vs 29.2% in the immediate preceding quarter.

• Exceptional YoY performance. The Group’s revenue elevated by 89.7% whilst PBT increased substantially by 397.4% in tandem with rising sales quantity (+26.4% YoY). Meanwhile, the operating profit/PBT bounced 374.4%/397.4% on the back of full utilization rate (98%) and lower energy cost.

• Capacity expansion on track. The Group has commissioned all 12 lines of Plant 6 to cater for the exceptional demand from overseas. In addition, the first line of plant 7 Next Generation Integrated Glove Manufacturing Complex (NGC) 1.0 is expected to operate in Q4CY2020 while other 6 lines to be completed by March 2021. Beyond that, the Group‘s NGC 1.5 will be equipped with 4 plants which are located beside the existing NGC, targeting to commence its 1st line towards Q4CY2021. Overall, NGC 1.5 is expected to add 19 billion pcs per annum to the existing capacity. Lastly, the Group has a target of manufacturing 95.1 billion pieces of gloves for its production capacity in 2027 by setting up NGC 2.0 which will further add on another 32.3 billion pieces of gloves.

• Vaccines for Covid-19 in the pipeline. More candidates are joining phase 3 clinical trials over the months such as Bharat Biotech from India and Murdoch Children’s Research Institute from Australia. Meanwhile, Johnson & Johnson and AstraZeneca have resumed their phase 3 trials after having hiccups as this hindrance is very common in vaccine development. As a result, we estimate a total number of 10.54 billion doses of COVID-19 vaccines will be available for 7.8 billion global population based on the candidates which are running for phase 3 trial (see Figure 1). Notably, AstraZeneca, J&J, and Pfizer are expected to release their interim results in November this year to ensure the vaccines are appropriate for emergency use like CanSino Biologics and Sinopharm in which vaccines have been approved for limited use in China and U.A.E.
   
• Slowing down of ASP growth. We notice that the momentum of ASP growth has slowed down significantly under Original Brand Manufacturing (OBM) level in Oct as compared to few months back. Thus, we deem the ASP has reached its peak level as OBM naturally enjoys the price hike ahead of original equipment manufacturer (OEM). This happen partly because of stocking up practice, accelerating of vaccine development, and massive supply from Thailand & China.

Earnings Outlook/Revision

• We lift our FY21F net profit estimate by 37.0% to RM2089.7m by increasing our margin assumption pursuant to operational efficiency and ASP hike. Meanwhile, we maintain our FY22 net profit estimate of RM1218.8m.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM16.02. Our target price is now pegged at 33x CY21F P/E. Our valuation is in line with its -0.5 SD of its 5-year mean P/E of 41x as we believe the window of opportunity is getting smaller upon approaching launch of Covid-19 vaccines which could happen as early as end of this year or early next year. In turn, it will cause the ASP to come down radically afterwards and hence affecting its earnings growth. Also, we reckon that incoming competition from new entrants could pose a threat to the ASP. 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

Source: JF Apex Securities Research - 28 Oct 2020