Better performance expected for Hartalega in upcoming quarters

Hartalega Holdings Bhd
(April 17, RM7.68)
Maintain outperform with a higher target price (TP) of RM9.30:We believe further rerating is imminent due to Hartalega Holdings Bhd’s growing market share with Malaysia accounting for 65% globally. We raise our net profit estimates for financial years 2021/2022 (FY21E/FY22E) by 2%/12% respectively after taking into account a higher utilisation rate. Our TP is raised from RM8 to RM9.30 based on 49.5 times estimated calendar year 2021 (CY21E) earnings per share (EPS).

We expect a better performance in subsequent quarters on an uptick in demand. Quarter-on-quarter, its second quarter of FY20 (2QFY20) and 3QFY20 volumes grew 14% and 13% respectively against the industry average of 6%, implying Hartalega was winning market share from competitors.

The Malaysian Rubber Glove Manufacturers Association has forecast a 20% demand growth to 230 billion pieces in 2020. We believe Hartalega will benefit from the robust demand which has led to longer delivery lead times (the moment an order is placed to delivery) that has risen to an average of 80 to 100 days, compared with 40 to 50 days normally.

Signs of demand outstripping supply could potentially lead to higher average selling prices (ASPs), coupled with incremental cost and higher operating expenditure. Looking at the stable raw material prices, ceteris paribus, hikes in ASPs are expected to lead to margin expansion. From our channel check, we understand industry players generally have raised prices by three to five per cent.

In terms of the outlook, the first four lines of Plant 6 (with an installed capacity of 4.7 billion pieces) have commenced commercial operations and the remaining eight lines are expected to be gradually ramped up.

Plant 7 is expected to be commissioned by early 2021, which will focus on small orders as well as speciality products with an installed capacity of 3.4 billion pieces. All in, Plant 5, 6 and 7 will add a total capacity of 12.1 billion pieces, raising installed capacity to 43.7 billion pieces per annum.

We reiterate “outperform” on Hartalega. Year to date, the stock is up 40% and looking at the previous upcycle when the stock rose 200%, this indicates potential further upside.

Our TP is raised from RM8 to RM9.30 based on 49.5 times CY21E EPS (previously 48 times) (at +2 standard deviation above the five-year historical forward mean). We switch our valuation from FY21E to CY21E.

We like Hartalega for: i) its solid management; ii) it is constantly evolving via innovative product development; and iii) its booming nitrile glove segment. Risks to our call include lower-than-expected ASPs and volume sales. — Kenanga Research, April 17