We reiterate our positive view on HARTA’s prospects over the next two quarters following a meeting with management together with other sell-side analysts. Key highlights include:- (i) the group conducted precautionary mass testing for all workers, and (ii) management is confident of sustained strong demand with capacity booked up till end CY21, with ASP higher QoQ between 40% and 50% in 2HFY21. We maintain our TP of RM26.22 based on 19.7x CY21E EPS (at -0.5SD below 5-year historical forward mean). At current price, the stock offers 7.5% dividend yield in FY22E.

Hit by COVID but minimal impact to FY20E net profit. The group underwent precautionary mass testing (PMT) in phases from Dec 7 to Dec 10. The PMT covered all employees as well as canteen & grocery shop operators within Hartalega premises at all locations (NGC, Bestari Jaya, Petaling Jaya & Sri Damansara offices). Out of the 8,772 workers, there were 35 positive cases (20 from Bestari Jaya, 15 from NGC). Following the results received, the positive cases were transported to hospitals as per Ministry of Health’s instruction. A thorough disinfection of all areas has been carried out by a third-party professional provider. The primary contacts identified are also undergoing quarantine for 14 days and will undergo subsequent testing before they are permitted to return to work. The temporary loss of a month production is <0.5% of total output is expected to impact FY20E bottom-line by <1%.

ASP higher in 3Q and 4QFY21. The group is confident of sustained strong demand with orders filled up till end-CY21, reassuring us that lag impact from ASP hike will be felt in 3QFY21 (50% QoQ compared to previously guided +40%) and 4QFY21 (+40%-+50% QoQ). ASPs still lag behind industry leaders by 25%. Our ASP assumption for FY21E/FY22E remains unchanged at USD50/USD65 per 1,000 pieces compared to current market price of USD90-100. Management expect ASP hikes to gradually ease somewhere in CY23 rather than undergoing a steep decline.

Outlook. To date, all 12 lines of Plant 6 (installed capacity of 4.7b pieces) have commenced commercial operations. The first 3 lines of Plant 7 have commenced operations in Nov and another 3 by Mar 2021 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 piling works have started in 4Q 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, expected to start in 1Q 2022.

Reiterate OP. We highlight that to reduce the spread of COVID-19 infection; vaccine coverage should reach 60%-70% to build some form of herd immunity. Typically, herd immunity occurs when enough people in a population develop protection against a disease that it can no longer spread easily among them. Elsewhere, scaling up production of vaccines and distribution could pose a challenge which means the pandemic is likely to remain over the medium term. We maintain our TP of RM26.22 based on 19.7x CY21E EPS (at -0.5SD below 5-year historical forward mean). We like HART for: (i) its solid management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment. At current price, the stock offers 7.5% dividend yield in FY22E.

Risks to our call include: (i) lower-than-expected ASP and volume sales beyond FY21, and (ii) faster-than-expected vaccine inoculation.

Source: Kenanga Research - 16 Dec 2020