In an announcement to Bursa Malaysia, Hartalega (HART) disclosed that it is buying a piece of land for RM263m which is located approximately 23km away from NGC 1. We are positive on this latest corporate development by HART which removes uncertainty with regards to land replenishment. This land is an integral part of the group’s future growth. TP is RM8.00 based on 48x FY21E EPS. Reiterate OP.

Land acquisition removes uncertainty. In an announcement to Bursa Malaysia, HART disclosed that it is buying a piece of land for RM263m measuring 95.1 acres which is located approximately 23km (Banting) away from NGC 1 and should yield operational synergies. We are positive on this latest corporate development by HART which removes uncertainty with regards to land replenishment. This acquisition provides earnings visibility beyond Plant 7 in NGC (completed somewhere in 2021). The acquisition works out to RM63.5/sq feet. This land is an integral part of HART embarking on a massive capacity expansion consisting of 82 new production lines with a capacity of 32.3b pieces which we believe is largely for nitrile gloves. The entire expansion when completed would cost RM3b and will be carried out over 9 years, from 2021 to 2029. When completed, HART’s glove production capacity will almost be doubled from 43.7b pieces (once plant 6 and 7 is fully commissioned by FY21) to a staggering 76b pieces p.a in 2029. The new lines are expected to boost productivity of 45,000 pieces/line/hour similar to NGC 1. This project will be undertaken by the Group’s wholly-owned subsidiary, Hartalega NGC Sdn Bhd. The acronym NGC refers to ‘Next Generation Integrated Glove Manufacturing Complex’.

Salient points of the project:- (i) The project known as NGC 2 will be located at Banting, Kuala Langat measuring 95.1 acres; (ii) The project will be spread over 9 years from 2021 to 2029 comprising seven plants with an aggregate 82 lines with total installed capacity of 32b pieces gloves; and (iii) Construction is expected to start sometime in 2021 and the first line is expected to commence in 2022. For illustrative purposes, the impact to financials are; (i) the RM263m land acquisition can comfortably be funded internally given its operating cashflow averaging RM620m per annum over the next 2 years, hence might not raise its net gearing and (ii) assuming 14% net profit margin, ASP of RM95/1000 pieces and utilisation rate of 90%, this new capacity could generate a total net profit of RM383m once completed.

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 43.7b 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. No changes to our earnings forecasts. TP is RM8.00 based on 48x 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 - 26 Mar 2020