Hartalega Holdings Bhd
(Aug 7, RM5.04)
Maintain hold with a lower fair value (FV) of RM4.96 from RM5.52 previously: We maintain our “hold” recommendation on Hartalega Holdings Bhd after rolling forward our valuation period to the forecasted 2012 financial year (FY21F) and reducing FY20F, FY21F and FY22F earnings by 16.8%, 19.1% and 19.9% respectively.

 
We have revised our earnings forecasts to account for a more muted sales volume growth as well as a higher operating cost. Our FV is based on 33 times FY21F price-to-earnings (P/E) which is the group’s historical three-year average forward PE.

Hartalega’s first quarter ended June 30, 2019 (1QFY20) core net profit of RM96.1 million (-21.8%  year-on-year [y-o-y]; 12% quarter-on-quarter  [q-o-q]) was below our and the street’s estimates, accounting for 16.9% and 18.5% of full-year forecasts respectively. The deviation was largely due to a lower-than-expected sales volume.

Hartalega’s 1QFY20 revenue fell 9.4% y-o-y to RM640.1 million (RM706.4 million in 1QFY19) due to an 8.5% decline in sales volume.

The group’s earnings before interest, taxes, depreciation and amortisation (Ebitda) fell 10.2% to RM155.1 million in 1QFY20 from RM172.7 million in 1QFY19. The Ebitda margin edged down by 0.2 percentage point to 24.23% in 1QFY20 from 24.46% in 1QFY19.

Competition remains stiff in the rubber glove industry due to the influx of supply. However, the delay in expansion of about 5.8 billion pieces by glove players eases the supply influx situation.

We expect the group’s top line to recover from 2QFY20. We also expect a 1% to 2% increase in average selling prices (ASPs) on the back of a gradual improvement in the group’s pricing power (the blended ASP in 1QFY20 was US$23.40 per thousand pieces versus US$23.30 in 4QFY19) and a weakening ringgit against the US dollar. Despite a lower average of US$23.40 per thousand pieces (from US$24.80 in 1QFY19), reduced sales volume and higher labour, electricity and gas costs, Hartalega was able to sustain its Ebitda margin. We believe this was due to improved efficiencies and cost-optimisation.

As such, we think the impact of higher gas tariffs and other margin pressures will be partly mitigated by Hartalega’s cost-optimisation efforts going forward. We anticipate the Ebitda margin to be at about 23.9% and 24.1% for FY20F and FY21F respectively.

Hartalega’s capacity is 36.5 billion pieces per annum currently. Hartalega has commissioned all 12 lines of its Plant 5 and is expected to commission its Plant 6 (+4.7 billion pieces) by the first quarter of calendar year 2020 (1QCY20) and Plant 7 (+3.4 billion pieces) by the second half of CY20 (2HCY20). The group also decommissioned five older lines (about 1.5 billion pieces) at its facility in Bestari Jaya, Selangor. Hartalega hopes to secure the US Food and Drug Administration’s approval to market its antimicrobial gloves in the US by 2HCY20.

We continue to like Hartalega for its foresight and execution, capacity expansion, product innovation and superior operating efficiencies. However, at its current price, we believe the stock is close to its full valuation. — AmInvestment Bank, Aug 7