KUALA LUMPUR (March 11): Investment analysts are positive on Hartalega Holdings Bhd's RM7 billion expansion plan in the long term. However, some of them have trimmed their target price (TP) for the world's largest nitrile glove maker as they see the sentiment has turned cautious on the sector.

Rapid capacity expansion in China, let alone those in Malaysia, meeting with an anticipated drop in demand following the faster-than-expected roll-out of vaccination globally, has prompted analysts to start cutting their hefty premium to the valuation of glove counters.

Kenanga Research analyst Raymond Choo said in a note today he is positive on Hartalega’s Bukit Kayu Hitam land acquisition which reaffirms its commitment towards long-term future expansion growth as well as capitalising on post-Covid-19 demand growth, estimated at 15% to 20% per annum.

While maintaining his "outperform" call on the stock, Choo trimmed his TP for Hartalega to RM17 from RM21, based on 17 times 2022 estimated earnings per share (EPS), due to the industry’s reduced lead time and diminishing sentiment on the sector.

Hartalega announced yesterday the acquisition of land in Bukit Kayu Hitam from Northern Gateway Free Zone Sdn Bhd for RM228.7 million (RM21 per sq ft). 

It will be investing RM7 billion to build 16 new glove factories in Malaysia's northern region over the next 20 years.

TA Securities analyst Tan Kong Jin is also positive on the acquisition, deeming the buying price as reasonable based on property listings in the vicinity from property portals.

However, he reduced his FY21 earnings estimate for the group by 14.8% after lowering his sales volume assumption by 9% as production in the fourth quarter ending March 31, 2021 (4QFY21) is expected to drop due to Covid-19 cases at its plants.

“We roll forward our valuation base year to FY23 to factor in a more normalised average selling price (ASP). Our TP is lowered to RM17.12 per share (previously RM23.60 per share) based on 26 times FY23 EPS,” Tan said while maintaining his "buy" call on the stock.

Meanwhile, AmInvestment Bank Research also lowered its TP for Hartalega to RM11.20, from RM13.56, reflecting a neutral environmental, social and governance (ESG) rating of three stars as the local research house maintained its "hold" call on the stock. 

“Our valuation is based on 25 times 2022 forecast EPS, which is at a 1 SD (standard deviation) discount on the five-year historical average. This is in view of the faster-than-expected roll-out of global vaccination as well as rapid capacity expansion by Chinese glove manufacturers,” it said.

It also reduced its FY21, FY22 and FY23 earnings estimates by 0.4%, 0.4% and 1.1% respectively to account for higher finance cost resulting from the land acquisition announced yesterday.  

Contributions from the new expansion plan are only expected to come in from FY24, it said. 

At the time of writing today, Hartalega was two sen or 0.2% higher at RM9.81, valuing the company at RM33.32 billion.