We reiterate our positive view on HARTA’s prospects over the next two quarters with the group confident of a sustained strong demand this year with capacity booked up till end CY21 and ASP higher QoQ in 4QY21. We maintain our TP of RM21.00 based on unchanged 15.8x CY21E EPS (close to -1.0SD below 5-year historical forward mean). We note that current high ASP momentum will likely wane in the longer term. At current price, based on our earnings forecast, the stock is trading at 8x FY22E EPS with dividend yield of 7.3%.

Industry ASP higher at least in 1QCY21 (4QFY21), expecting a solid 3QFY21. The group is confident of sustained strong demand with orders filled up till end-CY21 and higher ASP in 4QFY21 (by 40% to 50% QoQ). HART’s ASP still lags behind peers. Our ASP assumption for FY21E/FY22E remains unchanged at USD50/USD65 per 1,000 pieces compared to industry ASP which has risen in Jan and Feb CY2021 by as much as between USD90 to USD120. In line with higher industry ASP, HARTA in its past analysts’ briefing had indicated ASP could be raised by between 40% to 50% in 3QFY21 and 4QFY21. We expect its 3QFY21 PATAMI, which is due to be released by end-Jan, to be higher QoQ and YoY and also see contribution from Plant 7 and better margins due to higher ASP and operating efficiencies from new plants. For illustration purposes, based on a QoQ ASP increase between 40% to 50%, assuming volume remains constant; 3QFY21 PATAMI could come in at between RM954m and RM1,056m (+75% to +102% QoQ; 7-fold YoY) bringing 9MFY21 to between RM1,719m (+437%) and RM1,821m (+484%), at 59-65%/76% our/consensus full-year forecasts.

Capacity expansion plans on track. 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. 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 2020. 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 commence production in 1Q CY2022.

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 in 2021. No changes to our earnings forecasts pending release of 3QFY21 result. We maintain our TP of RM21.00 based on 15.8x CY21E EPS (close to -1.0SD below 5-year historical forward mean). We like HART for: (i) its solid management, (ii) constantly evolving via innovative product developments, and (iii) currently trading at 8x FY22E PER offering 7.3% dividend yield. We note that current high ASP momentum will likely wane in the longer term.

Risks to our call include: (i) lower ASP occurring sooner than expected since it is likely to be unsustainable in the long term, and (ii) faster-than-expected vaccine inoculation.

Source: Kenanga Research - 18 Jan 2021