Result

• Hartalega posted a net profit of RM1b for its 3QFY21 results which soared 83.8% qoq and 726.4% yoy. Meanwhile, revenue jumped 58.2% qoq and 167.4% yoy to RM2.1b.

• As for 9MFY21, both revenue and net profit escalated 104.8% yoy and 453.6% yoy respectively given massive sales volume on the back of higher average selling price (ASP).

• Above ours but below market expectations. 9MFY21’s net profit of RM1.8bil exceeds our in-house estimate which accounts for 84.5% of full year net profit forecast but below market expectations (69%).

• Dividend declared. The Group has declared second interim single tier dividend of 9.65sen/share during 3QFY21, thus brings cumulative dividend payout of 13.5sen/share as for 9MFY21 (make up 43.4% from our FY21F dividend

Comments

• Stronger QoQ growth…. The Group’s revenue and PBT escalated 58.2% qoq and 97.1% qoq respectively during 3QFY21, thanks to higher blended ASP in this quarter (+58.2% qoq vs 2QFY21: +40.1% qoq). Besides, encouraging sales were recorded during this period despite higher raw material cost as well as one-off foreign worker remediation cost. Additionally, the Group’s PBT margin increased by 12.5ppts to 63.2%. For the following quarter, management guided its blended ASP to grow between 40% and 50% qoq.

• ….as well as YoY performance. Hartalega’s revenue improved 167.4% yoy on the back of better PBT which jumped 742.8% yoy. The encouraging performance was spurred by higher sales volume amid higher blended ASP (+138.3% yoy). Nevertheless, utilization rate on the current quarter slightly eased to 95% (vs 3QFY20:96%) due to recent Covid-19 cases in Hartalega’s plants (in Dec’20) which led to temporarily close of several plants for one month.

• Sturdy 9MFY21F. Overall, revenue and PBT surged 104.8% yoy 449.8% yoy respectively in view of sturdy gloves demand during Covid-19 pandemic which resulted in robust sales volume and ASP. Besides, PBT margin rose by 32.9ppts to 52.4%.

• Capacity expansion is well underway. The Group has commissioned all 12 lines of Plant 6. Also, Plant 7 has been successfully commissioned with 4 lines year to date and is expected to add 2 more lines by Mar’21. Plant 7 will have annual capacity of 2.7bil upon fully commission. Besides, remaining 4 surgical plants to be commissioned in coming quarters to cater for its tremendous demand. Overall, the Group guided that the Group’s annual installed capacity is expected to increase to 44bil pieces by FY22. The management believes demand for gloves will remain intact during Covid-19 pandemic as well as post Covid-19 pandemic in view of higher hygiene awareness.
• Soothing ASP growth amid availability of Covid-19 vaccine. We deem the ASP trend to ease significantly going forward amid the availability of vaccine in the near term. Based on recent news, Malaysia is expected to receive its first phase of Pfizer vaccine by end of Feb’21. Meanwhile, the vaccine is widely adopted in the US and Europe which are the major consumers and price movers of the glove demand. Hence, we expect the demand for glove will ease from peak upon vaccination takes place, thus denting the positive momentum of ASP growth.

Earnings Outlook/Revision

• In view of our lower-than-expected forecast, we lift our FY21F and FY22F net profit estimates by respective 11.1% and 20.8% by increasing our margin assumption coupled with higher sales volume upon full commission of Plant 7.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM14.70 (from RM16.02 previously) as we assign lower PE of 30x CY21 in view of window of opportunity is getting slimmer upon widely adoption of Covid-19 vaccines as well as incoming competition from new entrants which could pose a threat to the ASP. Our valuation was lower than average 5-year mean P/E of 42.3x. 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. Market is forward looking and hence we opine that current share price is looking beyond its prevailing peak earnings and start to price in recovery theme for this year upon massive vaccination.

Source: JF Apex Securities Research - 26 Jan 2021