Hartalega Holdings Berhad - Momentum Remains

Date: 12/02/2020

Source  :  PUBLIC BANK
Stock  :  HARTA       Price Target  :  7.40      |      Price Call  :  BUY
        Last Price  :  16.00      |      Upside/Downside  :  -8.60 (53.75%)

Hartalega’s 9MFY20 net profit of RM319.2m accounted for 69% and 71% of our and consensus full-year estimates respectively but we deem the results to be broadly within our expectations, considering that we are expecting a sequentially stronger 4QFY20 due to the recent spike in rubber gloves demand, following the novel coronavirus outbreak. We note that Hartalega has received extra order enquiries from China, US and EU customers and we believe that the Group is more likely to benefit from higher US and EU orders, given these regions’ preference towards nitrile gloves. We reiterate our Outperform call, with a TP of RM7.40. On a side note, Hartalega declare a 2nd interim dividend of 1.8sen per share.

  • Still seeing continuous improvement in 3QFY20. Hartalega’s 3QFY20 revenue jumped 12.3% QoQ to RM796.6m, due to stronger sales volume (+12.9% QoQ), despite a slight decrease in ASP (-0.5% QoQ), which we attribute this to passing on savings from lower raw material cost to customers. Utilization rate also peaked during 3QFY20 to 96%, as compared to 2QFY20’s 85%. Majority of the sales volume growth stemmed from the North American market, whereby the revenue contribution from this region grew by 17.7% QoQ. Net profit for 3QFY20 grew by 16.8% QoQ to RM121.3m. PAT margins also improved by 0.6ppts QoQ to 15.2%, due to lower nitrile costs, coupled with marginally lower effective tax rate of 23.8%, as opposed to 24.1% in 2QFY20.
  • Expecting a stronger ending for FY20. In view of the recent coronavirus outbreak, we are expecting 4QFY20 to be stronger as we reckon the outbreak will help to drive global glove demand. While we note that Hartalega has recently received more glove enquiries from China, US and EU following the disease outbreak, we are of view that Hartalega will not benefit significantly from the extra orders to China as China generally uses more latex gloves, which only contribute to less than 3% of the group’s topline currently. In fact, we believe that the extra enquiries from US and EU customers are more likely to translate into orders and benefit Hartalega, given their preference for nitrile gloves.
  • Expansion updates. Following the commissioning of its Plant 6 (+4.7bn pcs pa) earlier this year, the Group has installed 2 out of 12 lines thus far, bringing total installed lines to 102 and installed capacity currently stands at 37.3bn pcs pa. As for Plant 7 (+3.4bn pcs pa), construction work has commenced and Hartalega aims to commission its 1st line by late CY20. Upon full commissioning of both plants, Hartalega’s annual production capacity should reach 44.7bn pcs by FY22F.

Source: PublicInvest Research - 12 Feb 2020

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