We are getting more excited with Hartalega’s prospects over the next few quarters in FY21 post its 4QFY20 results’ briefing. Specifically, industry trend of rising weekly and monthly ASP is expected to boost bottom-line. Amplifying the growth are restocking and inventory-building activities creating an abnormal demand spurt leading to acute supply shortage, due to the prolonged pandemic. Hence, we raised our FY21E/FY22E net profit by 22%/24%, to account for higher ASP and margin. TP is raised from RM11.66 to RM13.90 based on 50x CY21E EPS. Reiterate OP.

Demand to be strong over the next few quarters with industry ASP higher on a weekly and monthly basis. We are excited with Hartalega’s prospects over the next few quarters following the 4QFY20 results’ briefing. It is confident of visibility till end Dec 2020. Specifically, industry trend of higher weekly and monthly ASP is expected to boost bottom-line. Generally, industry allocations for the next few quarters have been taken up which augur well for Hartalega. For illustration purposes, ceteris paribus, since industry ASP is 3-5% higher on a QoQ and weekon-week basis, QoQ earnings can only be higher exponentially. As such we highlight that market consensus is still under-appreciating the potential impact from higher-than-expected ASP in this continuing pandemic and tight supply condition. Due to the tight supply situation, we expect buyers to jockey for position in order to secure allocation which will push up ASP. Personal Protective Equipment (PPE) of which glove is one of the components is presently much sought after, creating scarcity amid limited supply. The group will give priority to its existing customers which are major distributors. We believe Hartalega will benefit from robust demand as demonstrated by the industry’s longer delivery lead times (the moment order is placed to delivery) which has risen to an average of between 150 to 250 days as compared to 40 to 50 days normally. However, we are bullish on higher ASP as buyers continue jockeying to secure order allocations.

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 end 2020 or early 2021, which will focus on small orders as well as specialty products with an installed capacity of 2.4b 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 22%/24% after: (i) imputing higher ASP from USD26/1,000 pieces to USD29/1,000 pieces for each year, and (ii) assuming higher EBITDA margin of 26.5% compared to 24% previously.

Reiterate OP. YTD, the stock is up 100%, and looking at the previous up-cycle when the stock rose 200%, this indicates potential further upside. TP is raised from RM11.66 to RM13.90 based on 50x CY21E revised EPS (at +2.0SD above 5-year historical forward mean). We like Hartalega for: (i) its 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 - 29 May 2020