KEY INVESTMENT HIGHLIGHTS

• 1QFY21 earnings within expectation

• Net profit for 1QFY21 surged +133.6%yoy to RM219.7m

• ASP may increase by double-digit percentage in the coming quarters

• Earnings forecast revised higher due in view of favourable pricing and raw material cost

• Maintain Neutral with a revised TP of RM20.73

1QFY21 earnings within expectation. Hartalega Holdings Berhad’s (Hartalega) 1QFY21 core net income (CNI) of RM216.2m came in within our expectation at 25.9% of our full year estimates, but below consensus’ full year forecast at 17.3%. The company has announced an interim dividend of 2.10 sen, which is also largely within expectation.

Net profit for 1QFY21 surged +133.6%yoy to RM219.7m as revenue jumped +43.7%yoy to RM920.1m. This was attributed to the sales volume that increased by 38.5%yoy and higher average selling prices (ASP). This was coupled with raw material prices that remain low, enhanced operational efficiency due to the higher production volume and better economies of scale. Energy for the period was also lower year-on-year while the firm’s cost control initiative bear fruits. As a result, net earnings rose faster than revenue.

Sequentially, net profit jumped +81.7%qoq premised on revenue that increased by +15.5%qoq. This was due to production volume and ASP that rose by single digits compared to the immediate preceding quarter. On top of that, utilisation rate has improved to close to optimum level during 1QFY21 while raw material cost were lower.

ASP may increase by double-digit percentage in the coming quarters. Due to the unrelentingly high demand for gloves, ASPs may increase at a faster pace in the upcoming quarters compared to what had been recorded in 1QFY21. Spot orders, arising from new capacity built, is expected to make up less than 10% of sales volume. Allocation for spot order is taken up until March 2021. We opine that demand is likely to supersede supply due to the higher number of daily new cases in July at about 200,000 to 300,000 per day as compared to around 100,000 daily cases in April and May. Premised on that, we believe that prices for gloves are likely to increase further.

Production capacity expansion going well. Eight out of the 12 lines planned for Plant 6 has been commissioned since early of the year while the first line of Plant 7 is slated to start towards end of the calendar year. Meanwhile, high capacity lines in Plant 6 and 7 are expected to be completed by March 2021. With the additional capacity, production is estimated to increase to 42 billion pieces per year from the existing 37 billion pieces. The additional capacity is expected to fill in the higher demand of gloves by emerging markets and heightened hygiene awareness since the pandemic

Source: MIDF Research - 5 Aug 2020