Glove producer Hartalega released its financial results yesterday, posting weaker than expected results due to Covid induced shutdowns and freight delays. However, Macquarie Equities Research (MQ Research) notes that Hartalega remains its top pick within the gloves sector, maintaining Outperform on this stock.

Weak results on capacity and freight issues

• Hartalega’s (HART) 4QFY21 profits of RM1,119m brought FY21 profits to RM2,885m representing 93/95% of MQ Research’s/consensus estimates. The weaker than expected results were a result of Covid induced shutdowns during the quarter and freight delays, which resulted in a 29% quarter-on-quarter (QoQ) decline in sales volumes to 6.7bn pcs in 4QFY21. Management felt that glove average selling prices (ASP) had peaked and were likely to trend down but no guidance was offered given the dynamic situation. In the near term, HART should hold ASPs in 1QFY22.
• MQ Research remains cautious on the sector given the peaking of ASPs, however, for investors seeking exposure to the sector, HART remains MQ Research’s preferred play.

ASPs Peaked, Demand Remains Robust But…

• ASPs peaked. According to management, ASPs have peaked and they are preparing for a slide post 1QFY22. Management did note that prices to the EU have been weak owing to No.1 operator, Top Glove’s (TOPG MK, RM5.48, Neutral, target price (TP): RM4.90) push to unload gloves targeted for the US market into the EU, given the Customs and Border Patrol (CBP) restrictions on Top Glove’s products from Malaysia. This has meant that demand from the US base has increased and supporting the price premium in the US market. Nonetheless, customers are increasingly calling for lower prices.
• Market demand. According to management, demand for gloves remains robust and while there has been no surge since the recent uptick in cases in several countries, they do believe that there could be upside risks. Potential supply disruptions in the future could also provide ASP upside. MQ Research’s base case assumption is that although glove demand remains robust, supply responses will put pressure on ASPs.
• Payout ratio of 60% with final dividend per share (DPS). While the third interim DPS of 17.7sen has brought year-to-date (YTD) DPS to 33.3sen or a payout ratio of 39%, management confirmed that a final DPS to announced later will bring the FY21 payout ratio to 60%.

Action and Recommendation

• Outperform maintained.

12-month Target Price Methodology

• HART MK: RM14.40 based on a price-earnings ratio (PER) methodology
• TOPG MK: RM4.90 based on a PER methodology

Source: Macquarie Research - 5 May 2021