YTD, HARTA has fallen by 21% triggered by oversupply concerns, intense competition and lower ASPs. However, this is just a temporary rough patch and all the negatives have been priced in, per our view. Value is emerging in this well-managed company, which is consistently head and shoulders above peers in terms of efficiency, profitability and technology. Rolling forward valuation base from FY19E to CY20E, TP is raised from RM4.85 to RM5.85. Upgrade from MP to OP.

Pressure on ASPs, but the rough patch is temporary. In the last two years, the sector has become a victim of its own success. The frantic pace of capacity expansion has resulted in a mild excess supply for rubber gloves leading to ASPs compression and flattish or lower profits over the past two quarters. However, we take comfort that this is nothing more than just a temporary rough patch. However, with the rubber gloves players becoming aware of the intense competition since four months ago; over the last few months, they have implemented any of these measures; (i) slowed new capacity expansion, (ii) more measures to maintain margins including automation and other cost reduction initiatives, and (iii) intensifying sales efforts to penetrate emerging economies. Typically, the past two oversupply cycles lasted about 6-9 months. Having experienced various cycles of oversupply, we believe players, including HARTA, are more pro-active in carrying out measures to mitigate competitive pressure. As such, theoretically, the ASPs pressure problem in the sector should fully sort itself out within another quarter. Hence, we expect HARTA’s margins to recover and hence earnings to improve beyond an expected weak 4QFY19.

PER valuations has fallen from 48x to 31x. In anticipation of weakerthan-expected results in upcoming March quarter due to a combination of normalizing demand, swelling capacities and intensified competition, which are pointing towards potentially slower subsequent quarters, share price of HARTA has fallen by 35% from its high in Aug 2018. Consequently, PER valuation also has fallen from 48x to 31x (FY20 PER). We believe all the negatives have been priced in with valuations trading at more palatable PERs of between mean and +0.5SD of fiveyear forward average which appears undemanding.

Outlook. Looking ahead, Plant 5 of its NGC facility has commissioned 6 out of 12 lines with the remaining production lines to come on-stream progressively by end 1H 2019. Construction of Plant 6 structure has started with the supporting facilities to follow in 2H 2019. Plant 5 and Plant 6 will each have annual installed capacity of 4.7b pieces. Construction of Plant 7 is expected to begin in May 2019, which will focus on small orders as well as specialty products with an annual installed capacity of 2.6b pieces. We expect contributions from Plant 5 to drive FY19 earnings growth. Once completed, Plant 5 is expected to boost additional capacity by 14.5% to 37.2b pieces per annum. All in, Plant 5, 6 and 7 will add a total capacity of 12.1b pieces, raising installed capacity by 27% to 44.6b pieces per annum.

Upgrade from MARKET PERFORM TO OUTPERFORM. We roll forward our valuation base from FY19E to CY20E. Correspondingly, our TP is raised from RM4.85 to RM5.85 based on 36x CY20 EPS (at +1.0SD above 5-year historical forward mean). We like HARTA for: (i) its “highly automated production processes” model is moving from ‘good’ to ‘great’ as they are head and shoulders above its peers in terms of better margins with solid improvement in production capacity and reduction in costs, (ii) its superior quality nitrile gloves through product innovation, and (iii) the nitrile gloves segment is booming.

Upgrade from MP to OP. Risks to our call. Lower-than-expected ASPs.

Source: Kenanga Research - 23 Apr 2019