We attended Hartalega’s 3QFY21 earnings briefing and came away feeling positive on the company’s prospects going forward. We expect strong bottom line ahead from Hartalega given high utilisation rate of ~95% for the foreseeable future and ASP rising by a further 40-50% in 4QFY21. However, we take a conservative stance and keep our earnings unchanged. We maintain our BUY call and TP of RM19.05, pegged to an unchanged 21.5x PE on mid-FY22 earnings.

We attended Hartalega’s 3QFY21 earnings briefing and came away feeling positive on the company’s prospects going forward.

Volume trends. To recap, Hartalega’s sales volume in 3QFY21 was flat QoQ mainly due to logistical issues. The group shared that the backlog in deliveries have spilled over into 4QFY21. We continue to believe glove demand will stay strong for at least for the next 6-9 months with global daily cases still remaining elevated coupled with vaccine roll out (Figure #1). As such, we believe utilisation rate will continue to hover at current levels of ~95% for the foreseeable future.

ASP. While 3QFY21 ASP rose >60% QoQ in USD terms, management guided that they expect to see ASP increase by a further 40-50% QoQ in 4QFY21. While this may sound optimistic, we reckon it is possible, considering even after a 40-50% hike, Hartalega’s ASP would still be c.10-15% lower than the market rate for nitrile gloves.

Raw material costs. To recap, Hartalega’s nitrile butadiene cost rose by >50% QoQ in 3QFY21. While we note that prices have started to normalise in recent weeks (Figure #2), Hartalega still expects similar high prices sequentially into 4QFY21.

Long term expansion plans. Hartalega is on track to boost their capacity to 43.9bn pieces per annum by end-FY21. Management expects the global normalised demand for gloves to grow c.8-10% per annum in a post-pandemic environment driven by emerging markets with currently low glove consumption becoming more aware of hygiene standards post Covid-19. Due to this, Hartalega have outlined plans to double existing capacities to 95.1bn pieces per annum by 2027 (Figure #3).

ESG update. Hartalega continues to put workers safety at the forefront of their operations. In the age of Covid-19, we are greatly encouraged by measures put in place by the company to prevent the spread of Covid-19. Note that current measures put in place (periodic rapid testing etc.) amount to RM2m per month. Furthermore, Hartalega have shared that new worker dormitories being built will have a higher square footage per employee, in accordance with World Health Organisation (WHO) guidelines. With just 10 workers per dorm (from 40 workers previously), this not only provides a better standard of living, but also acts as a measure against the spread of Covid-19.

Forecast. Should guidance on ASP materialise, there may be a potential to surpass our forecasts in 4QFY21; however, we choose to take a conservative stance and keep our forecasts unchanged.

Maintain BUY, TP: RM19.06. We maintain our BUY call and TP of RM19.06 pegged to an unchanged 21.5x PE on mid-FY22 earnings.

Source: Hong Leong Investment Bank Research - 27 Jan 2021