Hartalega’s 9MFY21’s core PATMI of RM1,742.9m (+452.9% YoY) was above expectations, making up 67.7% and 68.1% of ours and consensus expectations respectively. The better than expected earnings was due to stronger than expected rise in ASP. After rolling over our valuation year to mid-FY22, our TP rises to RM19.06 (from RM18.35 previously) based on 21.5x PE multiple (-1.25 SD below 5 year mean) from 24x previously. Maintain BUY.

Above expectations. 3QFY21 core PATMI of RM970.9m (+77.5% QoQ, +738.7% YoY) brought 9MFY21’s sum to RM1,742.9m (+452.9% YoY). This was above expectations, making up 67.7% and 68.1% of ours and consensus expectations respectively. We deem this above expectations as we expect 4Q21 earnings to be disproportionately stronger mainly due to higher ASP trend which kicked in in 3QFY21. Also, the better than expected earnings was due to stronger than expected rise in ASP.

Dividends. Declared second interim dividend of 9.65 sen per share going ex on the 9 Feb 2021, which brings 9MFY21 sum to 13.5 sen per share. 3QFY20: 1.8 sen (9MFY20: 3.6 sen).

QoQ. As volumes were mostly flat, revenue increase (+58.2%) to RM2.1bn was mainly driven by higher ASP (+58.2%). Despite increase in raw material cost, core PATAMI rose 77.5% in tandem with higher revenue and better margins due to higher ASPs.

YoY. While utilisation rate was flat, volumes rose +12.2% due to higher capacity after completion of Plant 6. Revenue grew +167.4% due to both increase in sales volume and ASP (+238.3%). These two factors coupled with lower energy and upkeep expenses led to core PATAMI skyrocketing +738.7%.

YTD. 9MFY21 revenue more than doubled (+104.8%) from higher ASPs (+64.5%) and sales volumes (+24.6%). Better volumes were due to increased demand linked to Covid-19 pandemic, as production reached full capacity (utilisation rate 86% in 9MFY20 increased to 98% in 9MFY21). Higher sales volumes, ASPs in addition to lower energy and upkeep expenses led to core PATAMI rising +441.2%.

Outlook. With continued strong glove demand globally, Hartalega will continue to pursue capacity expansion. We note that Hartalega had completed Plant 6 (12 lines with an annual capacity of 4.7bn pieces) in Oct 2020. Before end-FY21, Hartalega expect to complete the commissioning of plant 7, of which four out of ten lines are already commissioned. Plant 7’s touted capacity of 2.7bn pieces p.a. is expected to take Hartalega’s total annual capacity to 44bn.

Forecast. We note that ASPs rose drastically QoQ (+58.2%). After factoring in higher ASPs going forward, our FY21/22/23 earnings forecasts rise by 4.9%/9.2%/1.4%.

Maintain BUY, TP: RM19.06. Despite the earnings upgrade, we also roll over our valuation horizon from FY21 to mid-FY22. However, this is partially offset by the lowering of our PE multiple from 24x to 21.5x (-1.25 SD 5-year average) to reflect potential sentiment dent from the rollout of vaccines globally which is expected to gain traction this year. All in all, our TP rises to RM19.06 from RM18.35 previously.

Source: Hong Leong Investment Bank Research - 27 Jan 2021