Investment Highlights

• We maintain our HOLD call on Hartalega Holdings (Hartalega) with a lower fair value of RM6.00 (from RM6.87). We have imputed a 3% premium for an ESG rating of four stars. Our valuation is based on a PER of 18x FY23F.

• Hartalega’s 1HFY22 earnings were within expectations. At RM3.17bil, its 1HFY22 earnings make up 71% of our and 82% of consensus FY22 forecast. We deem the earnings as within expectation as we expect a weaker 2HFY22. The downtrend of ASP is continuing and should affect 2HFY22 earnings.

• 2QFY22 earnings dropped 60% QoQ to RM914mil. This is due to ASP declining by 27% QoQ while sales volume shrank 34% QoQ. The ASP decline is in line with market prices for gloves which have passed its peak. As for sales volume, Hartalega plants were shut down due to the EMCO in July 2021 and its operation were only at 60% workforce capacity in accordance with the National Recovery Plan’s standard operating procedures.

• Hartalega announced a 35.2 sen dividend. Ex-date will be on 18 Nov with payment date on 2 Dec 2021. Operationally, Hartalega has commissioned 8 out of 10 lines in Plant 7, increasing its total capacity to 44bil pieces per annum. 90% of its staff have been vaccinated. The company plans to further improve its efficiency and automation level.

• Earnings estimate cut for FY22F and FY23F. We reduce FY22 earnings by 7% to RM4.15bil after assuming a higher effective tax rate. This is in line with the implementation of the one-off “Cukai Makmur”. Hartalega anticipates that the prosperity tax could have a material impact on its 2HFY22 earnings. We lower FY23F earnings by 27% to RM1.11bil after reducing our ASP assumption to US$27 (previously US$30). No change to our FY24F earnings as we maintain our gloves ASP of US$26.

• Fair value reduced to RM6.00. The reduction is mainly due to our lower earnings estimate in FY23. We have also increased our target PE to 18x (from 15x) which is the pre-pandemic average valuation for glove makers.

• Maintain HOLD. The upside is capped as the ASP downtrend continues. However, we expect this to end in early 2022. Having said that, the downside is also limited as its share price has fallen to below pre-pandemic level of RM5.92, which was last recorded on 31 Jan 2020.

• Back then, Covid- 19 has not spread to Malaysia and global daily cases were still low at less than 2,000 cases. ASP had not started its surge. As Hartalega’s capacity has expanded with a much stronger balance sheet, we believe that our valuation of RM6.00 is fair as its fundamentals remain intact.

Source: AmInvest Research - 3 Nov 2021