Hartalega’s expansion plans are well on track, having secured  the land for its Next Generation Integrated Glove Manufacturing Complex (NGC). We expect the capacity boost from this new facility to gradually kick in from  2015  and  double  the Group’s  total  capacity  by  2022  upon  full completion.  In  view  of  the  recent  run-up  in  its  share  price,  we downgrade our call to NEUTRAL, with FV unchanged at MYR6.26. 
 
- Landbank  expansion  for  the  future.  Hartalega  (HART)  yesterday announced that its wholly owned subsidiary, Hartalega NGC SB (HNSB) has  entered  into  an  agreement  to  acquire  a  piece  of  land  measuring approximately 120 acres located at Mukim Labu, Sepang, Selangor from Kumpulan  Tanjung  Balai  SB  for  a  total  cash  consideration of  MYR96m. The acquisition will be funded internally and via borrowings. Based on its 4QFY13  financials,  Hartalega  is  currently  sitting  on  a  cash  pile  of MYR182m and total borrowings of MYR12.1m.

- Capacity  to  hit  43bn  pieces  pa  by  2022.  The  acquisition  is  part  of HART’s  capacity  expansion  plans,  i.e.  the  land  is  earmarked  for  the NGC.  Management  has  allocated  a  total  capex  of  MYR1.5bn- MYR2.0bn  for  the  complex,  which  will  be  constructed  over  a  period  of eight years and consists of six plants with  a combined installed annual capacity  of  29bn  pieces.  While  the  quantum  appears  overwhelming  at first  glance,  we  reiterate  that  construction  will  be  carried  out  gradually over  a  eight-year  period  and  given  HART’s  operating  cash  flow generation  of  ~MYR300m  pa,  we  believe  the  funding  for  its  capex  will be  adequate.  Management  has  guided  that  its  major  shareholders  will convert  ~40.5m  outstanding  warrants,  which  we  believe  could potentially raise some MYR168m upon conversion. 

Upon completion, the NGC will expand HART’s total production capacity to  43bn  pieces  pa.  All  in,  we  are  positive  on  this  move  as  it  helps  to secure  the  Group’s  production  and  hence  earnings  growth  in  the foreseeable future. We also see potential costs synergies by  combining its plants in a single location. 

Source: RHB