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Tuesday, April 21, 2020

Hartalega Holdings Berhad - Still Good, But Priced-In

The outbreak of Covid-19 has created a spike in demand for Personal Protective Equipment (PPE) globally and share prices of glove makers have since had a good run considering that gloves are an important element of PPE. Following the outbreak of Covid-19 in China in late January, we upgraded our call on Hartalega to Outperform as we were of view that the situation could worsen and benefit the glove makers. Hartalega’s share price has since rallied over 40%. While we are still optimistic over Hartalega’s prospects in the near term due to the surge in demand for gloves, we believe that the positives have been largely priced-in, as Hartalega has never traded beyond +2SD during the good times in the past. As such, we downgrade Hartalega from Outperform to Neutral, with an unchanged TP of RM7.40, based on 48x CY20F EPS, which is at +2SD of its historical 5-year mean. Upside risk includes stronger-than expected earnings growth in the coming quarters due to margin expansion as Hartalega could raise ASP due to supply shortage.
  • Shortage of gloves and ASP revision. The Covid-19 pandemic has led to a significant increase in rubber gloves demand, resulting in a shortage in the market currently. However, due to its capacity constraint, we gather that Hartalega’s supply was insufficient to match the sudden surge in demand. Sales lead time has also increased from 1-2 months to 4 months as a result. Separately, we also note that the ASP has been adjusted upwards slightly, mainly to pass on the higher operating cost (ie: Covid-19 prevention cost, social compliance cost etc.).
  • Expansion. Hartalega has only commissioned 4 out of 12 lines in Plant 6 (+4.7bn pcs pa) as fitting of lines has been halted due to implementation of the Movement Control Order (MCO). However, we expect Hartalega to accelerate its lines fitting once MCO is lifted, in order to speed up its order fulfillment. Hence, we do not expect earnings growth to accelerate in 1QFY21F. On a separate note, we understand that Hartalega is not facing any labor shortage for Plant 6 presently, as it had previously obtained allocation for foreign labor from the authorities.
  • Sequentially better QoQ, but significant growth YoY. With the 4 new lines commissioned in 4QFY20, we anticipate sales volume for the quarter to grow by c.4% QoQ, given that the utilization rate has been rather stable at >95%. We project 4QFY20’s net profit to be in the range of RM123m-126m (+1-4% QoQ; +34-40% YoY). The sharp YoY jump is mainly due to low base effect, as Hartalega was hit by softening demand and stiff competition in 4QFY19. On a full year basis, we estimate FY20F’s net profit to range between RM442m and RM445m, which should be in line with our FY20F forecast at 95-96%.
Source: PublicInvest Research - 21 Apr 20

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