Kenanga Raised HARTA TP to RM24.66

Reiterate OP. TP is raised from RM22.30 to RM24.66 based on unchanged 43x CY21E revised EPS (at <+2.0SD above 5-year historical forward mean). We like Hartalega for: (i) its solid management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment

1QFY21 PATAMI of RM220m (+134% YoY; +90% QoQ) came in at 14%/17% of our/consensus full-year forecasts. We consider the results to be within expectations as the impact from higher ASPs will be felt in subsequent quarters. The group is confident of the strong demand sustained, with order-books already filled up till April 2021, emphasizing that the lag impact from ASP hike will be felt starting from 2QFY21. Raised FY21E/FY22E net profit by 10%/11% after imputing higher ASP from USD34/1,000 pieces to USD38/1,000 pieces for each year. TP is raised from RM22.30 to RM24.66. Reiterate OP.

Results’ review. QoQ, 1QFY21 revenue rose 18%, thanks to higher ASP (+10%) and sales volume (+7%) as utilisation hit 100% (4QFY20 was at 96%). Correspondingly, EBITDA margin expanded by 6.9ppt from 26.5% to 33.4% due to higher ASP and lower raw material cost. This brings 1QFY21 PATAMI to RM220m (+90%). No dividend was declared in this quarter. However, a final FY20 DPS of 2.1 sen was proposed bringing FY20 DPS to 7.8 sen.
YoY, 1QFY21 revenue rose 44% due to higher volume sales (+38%), and ASP (+4%). Correspondingly, EBITDA margin expanded by 9.2ppt to 33.4% from 24.2% due to higher ASP and lower raw material and energy costs coupled with the Group’s cost control initiative to reduce operation costs. This brings 1QFY21 PATAMI to RM220m (+134% YoY), boosted by a lower effective tax rate of 19% compared to 23% in 1QFY20.
Salient points from 1QFY21 results’ briefing conference call.
Management is of the view that demand over the next three years will remain strong with demand at two to three times higher than normal. Order-books have been filled up till April 2021. The group highlight that the glove industry is facing a structural change post pandemic with normal demand at 12% to 15% growth per annum compared to the normal 8-10% growth previously. The group reassured that lag impact from ASP hike will be felt starting from 2QFY20 with ASP higher by 30% QoQ.
Outlook. To date, first 8 lines of Plant 6 (installed capacity of 4.7b pieces) have commenced commercial operations and the remaining 4 lines are expected to be gradually ramped up. Plant 7 is expected to be commissioned by end-2020, which will focus on small orders as well as specialty products 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.
Raised FY21E/FY22E net profit by 10%/11% after imputing higher ASP from USD34/1,000 pieces to USD38/1,000 pieces for each year.

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