Highlights

Hartalega Holdings - 3rd Consecutive Sequential Earnings Improvement, Gathering Momentum

Date: 12/02/2020

Source  :  KENANGA
Stock  :  HARTA       Price Target  :  7.00      |      Price Call  :  BUY
        Last Price  :  16.00      |      Upside/Downside  :  -9.00 (56.25%)
 


9MFY20 PATAMI of RM319.2m (-13% YoY) came in at 63%/69% of our/consensus full-year forecasts, slightly missing our expectation. Looking further ahead, the strong 3QFY20 earnings momentum will continue into FY21 with solid double-digit YoY growth from 4QFY20 onwards, with demand uptick further spurring subsequent quarters. We stay bullish despite the stock already appreciated 22% since our April 2019 upgrade. TP kept at RM7.00. Reiterate OP.

9MFY20 PATAMI of RM319.2m (-13% YoY) came in at 63%/69% of our/consensus full-year forecasts. The results slightly missed our expectation. More importantly, the strong earnings momentum is seen sustaining in subsequent quarters into FY21, and we expect solid double-digit YoY growth starting from 4QFY20 which is expected to further spur subsequent quarters being boosted by demand surge triggered by the Wuhan virus outbreak. A 2nd interim DPS of 1.8 sen was declared bringing 9MFY20 DPS to 3.6 sen which is in line with our expectation.

QoQ, 3QFY20 revenue rose 12% thanks to higher sales volume (+13%) as utilisation hit a milestone 96% (2QFY20 is 85%) which more than offset a lower ASP (-1%). This quarter marks the 2nd consecutive quarter of mid-teens volume growth indicating signs of uptick in demand which is expected to drive earnings in subsequent quarters. This brings 3QFY20 PATAMI to RM121m (+17% QoQ).

YoY, 9MFY20 revenue came in marginally higher by 0.1% to RM2.1bn largely due to higher volume sales (+6%) being negated by lower ASPs (-5%). 9MFY20 PBT fell 5% as PBT margin fell 0.9ppt to 19.5% from 20.4% in 9MFY19 which brings 9MFY20 PATAMI to RM319.2m (-13% YoY), dragged down by a higher effective tax rate of 23.5% compared to 16.7% in 9MFY19.

Stage is set for a recovery in demand for nitrile. The key highlight of 3QFY20 results is HARTA’s second consecutive quarterly midteens sales volume growth which indicates that both demand and volume sale are on track to pick up in subsequent quarters. The first two lines of Plant 6 (installed capacity of 4.7b pieces) has commenced commercial operations and the remaining 10 lines are expected to be gradually ramped up. Plant 7 is expected to be commissioned by end 2020, which will focus on small orders as well as specialty products with an annual installed capacity of 3.4b pieces. All in, Plant 5, 6 and 7 will add a total capacity of 12.1b pieces, raising installed capacity by 27% to 44.7b pieces per annum.

Trim FY20E net profit by 5% after taking into account of lower ASPs. However, we maintain our FY21E earning forecast as we expect the solid results to continue, driven by uptick in demand. We continue to remain positive for sequential quarterly earnings recovery to gather momentum underpinned by uptick in nitrile demand, mainly driven by re-stocking activities as the current outbreak of the Wuhan virus enforces higher hygiene standards.

Reiterate OP. We like HARTA for: (i) its “highly automated production processes” model, which is moving from ‘good’ to ‘great’ as they are head and shoulders above its peers in terms of better margins and cost reduction management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment. The stock has appreciated 22% since our upgrade in April 2019. Our TP is RM7.00 based on unchanged 42.5x FY21E EPS (between +1.5 to +2.0 SD above 5-yr historical forward mean). Reiterate OP.

Risks to our call. Lower-than-expected ASPs, volume sales and longer-than-expected approval for its anti-microbial gloves.

Source: Kenanga Research - 12 Feb 2020

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