Result

• Hartalega posted a net profit of RM2.3b in 1QFY22 which jumped 101.9% qoq and 928.4% yoy. Meanwhile, revenue stood at RM3.9b which soared 69.7% qoq and 324.2% yoy.

• Above expectation. 3MFY22 net profit of RM2.3b exceeds our in-house (134.5%) and market estimates (59%) of full year net profit forecast spurred by stellar sales volume given its improved utilization rate coupled with higher average selling price (ASP).

Comments

• Improved utilization rate boosted QoQ growth. Hartalega’s revenue increased 69.7% qoq following higher sales volume as utilization rate improved by 96% during this period (vs 64% during 4QFY21). In conjunction with that, sales volume for latex and nitrile gloves escalated 113% qoq and 151% qoq on the back of higher average selling prices (ASP) c.+30% qoq. Besides, PBT also improved by +8ppts qoq arising from higher sales volume despite higher material prices. Management guided that ASP to decline c.30% qoq in the next quarter amid lower utilization rate following recent shutdown in July’21 and only able to operate on 60% workforce restriction during National Recovery Plan (NRP) phase 1, thus leading to loss of production capacity by 30%.

• Higher ASP as well as higher sales volume spurred YoY performance. The Group’s revenue and PBT jumped 324.2% yoy and 955.4% yoy respectively during this period, thanks to higher blended ASP [ASP (RM/'000 pcs): +383% yoy] as well as higher sales volume [Latex: +43% yoy, Nitrile:+114% yoy]. Additionally, the Group incurred lower utilities expenses on the back of higher sales volume, which mitigated the increase in raw material prices. Therefore, PBT margin rose by +44.1pts yoy during 1QFY22.

• Delay in NGC expansion due to current NRP phase 1. As of year to date, the Group has invested RM2.2b for Next Generation Integrated Glove Manufacturing Complex (NGC) expansion with 80 production lines are running at NGC currently. 6 out of 7 plants at NGC are fully operational as Plant 6 has commissioned all its 12 lines while Plant 7 has commissioned 8 lines since Nov’20. Besides, remaining 2 surgical plants to be commissioned in coming quarters. Meanwhile, as for NGC 1.5 development (Plant 8 to Plant 11), it has been delayed due to NRP phase 1 as construction works were unable to take place amid current circumstances. NGC 1.5 will cater for 48 lines and 19b pieces installed capacities per annum. Nevertheless, the piling works has started but first line commencement is expected to take place in 1QCY22.

• Risk mitigation to retain orders following tight gloves production during NRP phase 1. As the company is only able to operate at 60% workforce during NRP phase 1, some of the Group’s customers have shifted its gloves orders to China’s glove manufacturers in order to fulfil the demand. The Group has to bear 30% cut in their production and running at lower utilization rate about 70%. We understand that the risk mitigation is taken place to minimise the impact of order delay with limited production capacity at this moment. Customers decided to fulfil insufficient demand by buying from China’s gloves manufacturers rather than waited the postponed orders from Hartalega. Nevertheless, the Group believes the order will back to normal as NRP moves to phase 2 and hence they are able to run at full capacity.

• Current soothing ASP trend led to lower customers’ inventory levels. Customers have adjusted their inventory levels and currently carry light inventory about one to three months following recent decline in ASP in order to manage their existing inventory costs. Nevertheless, the Group expect ASP movement to be mitigated by gradual decline in raw material prices as new nitrile capacity comes on the stream. Nevertheless, we deem the ASP to continue to fall significantly going forward, amid current fast rollout of vaccination programme as well as new glove makers which jumped into the bandwagon earlier has started to commence production in 2HCY21. Notably, as of 1st August 2021, at least 50.2% of American population have been fully vaccinated (as sales dominated by America). Hence, we believe the demand for glove has eased from its peak upon full vaccination, thus denting the positive momentum of ASP growth moving forward.

Earnings Outlook/Revision

• In view of our lower-than-expected forecast, we lift our FY22F and FY23F net profit estimates by 84.5% and 38.5% to RM3.1b and RM1.8b 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 RM7.00 (from RM11.20 previously) as we assign lower PE of 11.5x (28x previously) CY22 EPS of 60.8sen (40sen previously), lower than -1 standard deviation of 20.8x. The lower PE assigned is in view of soothing outlook for rubber glove industry following decline in ASP trend on the back mass vaccination rollout. We peg our valuation to CY22 instead of FY22 considering the impact of earnings normalisation in 2HFY22F after exceptional strong profit growth in FY21 pursuant to the pandemic.

Source: JF Apex Securities Research - 4 Aug 2021