Result

• Hartalega registered a net profit of RM1.1b during last quarter of FY21 which soared 11.7% qoq and 878.2% yoy on the back of massive revenue of RM2.3b, +8.0% qoq and +195.5% yoy.

• As for full year FY21, both revenue and net profit accelerated 129% yoy and 565.4% yoy respectively, spurred by sturdy sales volume on the back of higher average selling price (ASP).
   
• Above ours but within market forecasts. 12MFY21’s net profit of RM2.9b exceeds our in-house estimate which accounts for 126% of full year net profit forecast but within market expectations (96.7%).
   
• Dividend declared. The Group has declared a third interim single-tier dividend of 17.7sen/share during 4QFY21, thus bringing its cumulative dividend payment to 31.2sen/share for FY21. This dividend payout translates into a 3.1% dividend yield.

Comments

• Lower utilisation rate on QoQ basis despite stronger revenue given higher ASP. The Group’s revenue escalated 8.0% qoq in view of higher blended ASP (+53.1% qoq) despite lower sales volume. Lower sales volume was dented by temporary closure of production lines due to Covid-19 cases as well as shipment issue in relation to global container shortage which led to utilisation rate running at 64% during 4QFY21. Meanwhile, PBT increased 12.3% qoq in view of lower operating cost thus lifting PBT margin by 2.5ppts qoq which offset increase in raw material prices. Management guided that nitrile price has moderated and ASP had softened ahead of the nitrile price.

• Higher ASP boosted YoY performance. Hartalega’s revenue increased 195.5% yoy amid stellar PBT growth which soared 988.4% yoy underpinned by higher blended ASP (+273%.7 yoy) despite lower sales volume (Nitrile: -20.6% yoy and Latex: -32.3% yoy). Besides, the Group’s PBT improved further, banking on lower utilities and upkeep expenses.

• Tremendous 12MFY21. Overall, revenue and PBT surged 129% yoy 586.6% yoy respectively stemming from massive sales volume as well as higher blended ASP in view of surging glove demand during Covid-19 pandemic. Additionally, PBT margin rose sharply by 38ppts to 57%.

• Capacity expansion is on track. The Group has invested RM2.2b for Next Generation Integrated Glove Manufacturing Complex (NGC) expansion as of year-to-date. Also, 76 production lines are running at NGC currently, while 6 out of 7 plants at NGC are fully operational. Meanwhile, Plant 6 has commissioned all its 12 lines, while Plant 7 has commissioned 6 lines since Nov’20. Besides, remaining 4 surgical plants to be commissioned in coming quarters to cater for its tremendous demand. The management remains optimistic on the glove demand in view of recent spike in global and domestic Covid-19 cases. Besides, on its recent acquisition of land in Kedah amounting RM7b of capex, management highlighted that it is meant for long term-investment with an expectation to build 16 plants there. Overall, Hartalega expects to have 95b pieces production capacity by 2027 with additional four more new plants to be built in the existing site in Sepang.
   
• Soothing ASP growth amid recent spike in Covid-19 cases. We deem the ASP trend to ease significantly going forward amid higher rollout of vaccine in the near term. Despite recent spike of Covid-19 cases, we expect higher rollout of vaccination in the near term as well as higher efficacy of vaccine, thus curbing the spread of Covid-19 cases. Hence, we believe the demand for glove has eased from its 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 FY22F and FY23F net profit estimates by 13.3% and 30% respectively 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 RM11.20 (from RM14.70 previously) as we roll over our valuation to CY22. Our valuation is now pegged at 28x CY22 EPS of 40sen, lower than its average 5-year mean P/E of 41.3x. We peg our valuation to CY22 instead of FY22 considering the impact of earnings normalisation in FY22F after exceptional strong profit growth in FY21 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 mass vaccination.

Source: JF Apex Securities Research - 5 May 2021