Summary

• Following the sharp spike in both top and bottom line delivered by other glove players’ listed on Bursa Malaysia over the past two months; we now expect a bumper earnings growth on HARTA in 1QFY21 with the improvements to sustain for the subsequent quarters. The uprising demand may attribute to production utilisation staying at elevated level over the next 12-18 months as the group focus on the completion of the remaining production lines under Next Generation Integrated Glove Manufacturing Complex (NGC) in 2022 to meet the robust demand. Upon completion, total installed capacity will hit 43.7bn pieces per annum (increasing from 38.1bn pieces per annum at present).

• Beyond that, the acquisition of 38.5-ha. land in 1Q2020 valued at RM263.1m located near NGC will mark the next phase of production expansion, namely NGC 2.0. The new plant is expected to take up total of RM3.0bn in CAPEX over a span of eight years to house seven plants running at similar efficiency of NGC will result in production to ramp to approximately 76.0bn pieces per annum in 2029. We view the move positive as the group remains committed to expand their production capabilities on a progressive pace to match the rising demand over the long term.

• Demand-supply imbalance is expected to remain in place as the capacity expansion of all glove players coupled with the new entrants of glove players in the pipeline would not be able to match up to the upward trajectory demand stemmed from the rising new cases of Covid-19. Already, the Malaysian Rubber Glove Manufacturers Association (Margma) expects the world’s demand for natural and synthetic rubber medical gloves to be about 345.0bn pieces in 2020, representing 15.8% YoY rise from 298.0bn in 2019.

• Meanwhile, the rising demand that outweighs the supply has driven the ASPs for 1,000 pieces of gloves from US$25 to US$100 bodes well for glove players margins and we expect the trend not to taper anytime soon. Even if the Covid-19 pandemic were to be contained by end-2020, the rising healthcare awareness may see demand for healthcare product to be on the rise as daily activities adjust to the new normal.

Valuation & Recommendation

• We maintained our HOLD recommendation on Hartalega as we expect demand not tapering anytime soon following the rising new cases of Covid-19. Our target price was also revised higher at RM18.00 (from RM7.89) by ascribing to a higher target PER of 53.0x (from 50.0x) to Hartalega’s FY21f revised EPS of 33.9 sen after accounting to the upward revision of ASPs and higher utilisation rate. The target PER is at +1.0SD of 5Y historical forward average, which is justifiable premised to the solid demand over the upcoming 12-18 months and rising ASPs which has yet to see any signs of tapering at current juncture.

• Our target PER remains at a premium to Hartalega’s competitors premised on: (i)Hartalega’s solid position as the global market leader in the nitrile glove segment that saw majority of sales to US; one of the countries with rising new cases of Covid-19, (ii) superior operational efficiency in terms of production speed and the lower number of workers per glove output and (iii) solid fundamentals where it commands the highest margins vs. its peers.
• Downside risks to our recommendation include slower demand should Covid-19 pandemic be contained sooner-than-expected as well as a weaker USD against the ringgit. The latter could result in margins compression as Hartalega’s sales are mainly export-oriented.

Source: Mplus Research - 14 Jul 2020