The stage is set for a solid FY20 after three quarters of anaemic quarterly earnings growth. Amplifying the growth is restocking activities reinforced by the pandemic with longer delivery lead times indicating that demand will outstrip supply at least over the medium-term. We believe further re-rating is imminent due to its growing market share with Malaysia accounting for 65% globally. The stock has risen 55% since our upgrade in April 2019. Raised FY21E/FY22E net profit by 2%/12% after taking into account higher utilisation rate. TP is raised from RM8.00 to RM9.30 based on 49.5x CY21E EPS. Reiterate OP.

Expect a softer sequential 4QFY20 but solid YoY growth. Signs of pent-up demand for nitrile gloves, most probably on re-stocking activities surmised from industry longer delivery lead times, are pointing towards a better sequential quarter in 4QFY20. For illustration purposes, taking the cue from 3QFY20 net profit of RM121m, due to the shorter working month in February and only partial commercial production from two lines in Plant 6, we forecast 4QFY20 core PATAMI of between RM123m and RM125m (+1-+3% QoQ; +35%-+37% YoY) bringing FY20E PATAMI to between RM442m and RM444m or 91%- 98% of our/consensus forecasts which is below our expectation. Nevertheless, we are expecting better performance in subsequent quarters on the back of an uptick in demand. Note that QoQ, its 2QFY20 and 3QFY20 volume grew 14% and 13%, respectively, against industry average of 6%, implying HART is winning market share from competitors.

Higher volume sales and ASP; longer delivery lead times. Longer delivery lead times are indicating that demand will outstrip supply at least over the medium-term. The Malaysian Rubber Glove Manufacturers Association has forecast a 20% demand growth to 230b pieces in 2020. We believe HARTALEGA will benefit from robust demand which has led to longer delivery lead times (the moment order was placed to delivery) which has risen to an average of between 80 to 100 days as compared to 40 to 50 days normally. Signs of demand outstripping supply could potentially lead to higher ASPs coupled with incremental cost and higher opex. Looking at the stable raw material prices, ceteris paribus, hikes in ASPs are expected to lead to margins expansion. From our channel check, we understand industry players generally have raised prices by 3-5%.

Outlook. The first 4 lines of Plant 6 (installed capacity of 4.7b pieces) have commenced commercial operations and the remaining 8 lines are expected to be gradually ramped up. Plant 7 is expected to be commissioned by early 2021, which will focus on small orders as well as specialty products with an 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.

Raised FY21E/FY22E net profit by 2%/12% after imputing higher utilisation rate of 90%/90% for FY21E/FY22E to 92%/95% and EBITDA margin from 23.3% to 24.0%.

Reiterate OP. YTD, the stock is up 40% and looking at the previous upcycle when the stock rose 200%, this indicates potential further upside. TP is raised from RM8.00 to RM9.30 based on 49.5x CY21E EPS (previously 48x) (at +2.0SD above 5-year historical forward mean). We switch our valuation from FY21E to CY21E. We like HART for: (i) a solid management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment.

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

Source: Kenanga Research - 17 Apr 2020