We strongly reiterate our positive view on HARTA’s prospects for the next few quarters following a meeting with their investor relations staff recently. The group is confident of sustained strong demand with capacity booked up till end CY21, reassuring that the lagged impact from ASP hike will be felt in 2H FY21. While we raised our FY21E/FY22E net profit by 45%/106% to account for higher ASP assumptions, our target price is unchanged as we lowered our target PER rating to -0.5SD below 5-year mean (compared to above mean previously) to reflect a moderation in earnings growth towards more sustainable levels beyond FY22. Nevertheless, there remains ample upside to our target price of RM26.22. Reiterate Outperform.

Industry ASP higher in Sept to Nov, expect a solid 2QFY21. We highlight that industry ASP has risen for Sept to Nov delivery suggesting that the robust demand will continue over the next few quarters. In line with higher industry ASP, HARTA is expected to raise ASP by 30% and 40% in 2QFY21 and 3QFY21, respectively. We expect a hike in raw material prices and potential tight supply in formers due to supply constraints forming a potential potent combination for higher ASPs. We expect its 2QFY21 PATAMI, which is due to be released by end-Oct, to be higher QoQ and YoY in tandem with solid sector growth due to higher volume from new capacity expansions of Plant 6 and 7 and better margins due to higher ASP and operating efficiencies from new plants. For illustration purposes, based on our net margin forecast of 38%, volume sales of 9.5b pieces and ASP of between USD32 to USD35 per 1,000 pieces (USDMYR4.15); 2QFY21 PATAMI could come in at between RM480m and RM524m (+118 to +138% QoQ; >3-fold YoY) bringing 1HFY21 to between RM699m (+253%) and RM743m (+275%), at 26%/40% our/consensus full-year forecasts.

Outlook. To date, the first 10 lines of Plant 6 (installed capacity of 4.7b pieces) have commenced commercial operations and the remaining 2 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. Beyond plant 7, 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 would be mostly for nitrile gloves and to start in 1Q 2022.

Raised FY21E/FY22E net profit by 45%/106% after: (i) imputing higher ASP from USD41/43 per 1,000 pieces in FY21/FY22 to USD50/65 per 1,000 pieces, and (ii) raising EBITDA margin from 42%/42% to 51%/60%.

Reiterate OP. However, we maintain our TP of RM26.22 based on 19.7x CY21E EPS (vs 38x previously) (at -0.5SD below 5-year historical forward mean). We lowered our PER rating as we believe valuations are already pegged to super-normal earnings; hence, moderation in earnings momentum beyond this phase 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 - 14 Oct 2020