In an announcement to Bursa Malaysia, Hartalega (HART) disclosed that it is buying a piece of land for RM158.3m which is strategically located adjacent to its existing NGC where all necessary infrastructures are readily available. We view this positively as it will bridge the production timeline gap between NGC1 and NGC2. We also raise our FY21E/FY22E net profit 18%/24% after raising ASP assumptions. TP is raised from RM24.66 to RM26.22 based on 38x CY21E revised EPS. Reiterate OP.

Land acquisition to enable capacity expansion to cope with surge in pandemic demand. In an announcement to Bursa Malaysia, Hartalega (HART) disclosed that it is buying a piece of land for RM158.3m measuring 60.6 acres strategically located adjacent to its existing NGC where all necessary infrastructures are readily available. The acquisition works out to RM60/sq feet. We are positive on this latest corporate development by HART which will bridge the production timeline gap between NGC1 and NGC2. NGC1 is expected to be fully completed by 2021 and there is a potential new production gap between NGC1 and NGC2; hence, the acquisition of this land. Recall, in March 2020, HART disclosed that it is buying a piece of land aptly named NGC2 for RM263m (RM63.5/sq feet) measuring 95.1 acres which is located approximately 23km away in Banting from NGC 1. This latest project known as NGC 1.5 is expected to have four plants built with an estimated capacity of 19b pieces and construction is expected to start some time in 2021. NGC 2 is expected to have 82 new production lines with a capacity of 32.3b pieces which we believe is mostly for nitrile gloves and expected to start in 1Q 2022. The acronym NGC refers to ‘Next Generation Integrated Glove Manufacturing Complex’. The RM153m land acquisition can comfortably be funded internally given its operating cash flows seen averaging RM1.9b per annum over the next 2 years; hence, the acquisition may not raise its net gearing. Coupled with the previous acquisition of 95 acres of land in Banting to build NGC 2.0, total annual installed capacity will increase to 95b pieces upon completion by year 2027.

Outlook. To date, the first 8 lines of Plant 6 (installed capacity of 4.7b pieces) have commenced commercial operations and the remaining 4 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 installed capacity of 2.7b pieces. With the progressive commissioning of Plant 6 and 7, the group’s annual installed capacity is expected to increase from current 39bn to 44bn pieces by FY22.

Raised FY21E/FY22E net profit by 18%/24% after: (i) imputing higher ASP from USD34/1,000 pieces to USD41 and USD43/1,000 pieces FY21E/FY22E, and (ii) raising EBITDA margin from 39% to 42%.

Reiterate OP. TP is raised from RM24.66 to RM26.22 based on 38x CY21E revised EPS (previously 43x) (at <+1.0SD above 5-year historical forward mean). We lowered our PER rating as we believe valuations are already pegged to supernormal earnings; hence, upside to peak earnings should have been factored in. We like HART 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 ASP and volume sales.

Source: Kenanga Research - 11 Aug 2020