YTD, the stock is up 21%. Share price is +35% since our upgrade in April 2019. However, we are still positive and remain bullish on Hartalega (HART)’s growth prospect going forward, underpinned by demand uptick with past two quarterly results pointing towards a strong volume growth. The lacklustre demand in the past 12 months coupled with the importance of higher standards of hygiene reinforced by the outbreak of Covid-19 is expected to ramp up re-stocking activities. TP is raised from RM7.00 to RM8.00 based on 48x FY21E EPS. Reiterate OP.

PER valuation to hit >+2.0SD in tandem with peak earnings in coming quarters. With the lackluster demand of the past 12 months behind us, we see re-stocking activities ramp-up as the current outbreak of Covid-19 enforces higher hygiene standards. Looking at historical peak earnings valuations, HART was traded at between +1.5SD to >+2.0SD forward mean. The key highlight of 3QFY20 results is HARTA’s second consecutive quarterly mid-teens sales volume growth which indicates that both demand and volume sale are on track to pick up in subsequent quarters. Note that QoQ, 2QFY20 and 3QFY20 volume grew 14% and 13%, respectively, against industry average of 6% potentially implying HART is winning market share from competitors.

HART’s share price moves in tandem with weakening of MYR against the USD. Weakening of Ringgit (RM) vs. US dollar (USD) is positive to rubber glove players. YTD, the USD has risen by 8% against the RM (1USD = RM4.44). Generally, a weakening MYR is positive for glove makers. Since sales are USD-denominated, theoretically, a depreciating ringgit against the dollar will lead to more revenue receipts for glove makers. Ceteris paribus, a 1% weakening of RM against USD will lead to an average 1-2% increase in the net profit of rubber glove players. Our base case assumption for USD/MYR is 4.15. Note that its share price moves in tandem with weakening of MYR against the USD (see chart overleaf).

Nitrile market share to gain momentum. Based on our analysis, we expect nitrile gloves to continue growing and grabbing market share from latex gloves. The growth in nitrile segment is evident. For illustration purposes, going forward, assuming nitrile:latex breakdown of 80:20 (presently is 67:37) and based on estimated global demand of 324b pieces in 2020 (forecast for 2019 is 300b pieces and assuming 8% growth rate in 2020), this implies nitrile growth rate of 30% or an additional 51b pieces from switch to nitrile gloves. Ceteris paribus, a 1% increase in volume sales will raise our FY21E net profit by 1.2%.

Production on track. The first two lines of Plant 6 (installed capacity of 4.7b pieces) have commenced commercial operations and the remaining 10 lines are expected to be gradually ramped up. Plant 7 is expected to be commissioned by end 2020, which will focus on small orders as well as specialty products with an annual installed capacity of 3.4b pieces. All in, Plant 5, 6 and 7 will add a total capacity of 12.1b pieces, raising installed capacity to 44.7b pieces per annum.

Reiterate OP. We like HART for: (i) its “highly automated production processes” model, which is moving from ‘good’ to ‘great’ as they are head and shoulders above peers in terms of better margins and cost reduction management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment. TP is raised from RM7.00 to RM8.00 based on 48x (previously 42.5x) FY21E EPS (at +2.0SD above 5-year historical forward mean).

Risks to our call. Lower-than-expected ASPs and volume sales.

Source: Kenanga Research - 25 Mar 2020