CGS-CIMB ups Hartalega target price to RM20 on higher ASPs, after ‘too conservative’ forecast earlier

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KUALA LUMPUR (July 12): CGS-CIMB Research has raised its target price (TP) on Hartalega Holdings Bhd to RM20 from RM14.60 previously, after revising its average selling price (ASP) estimates for the glovemaker.

In a research note, analyst Walter Aw said: “We have been too conservative in our previous ASP forecasts for Hartalega as we are of the view that it is likely to raise prices on a more gradual basis against its peers.”

Aw believes there is an acute shortage of gloves globally which has resulted in strong average order book visibility of at least six to eight months for Malaysian glove makers including Hartalega, leading to glove buyers willing to offer higher ASPs to secure supply.

“As such, we are raising our ASP forecasts for their [Hartalega] gloves by +22.0%/-8.5%/-7.0% vs our current forecast of +23.5%/+4.0%/-12.0% for FY21/22/23F.”

In addition, Aw thinks that Hartalega’s ASPs are “stickier” due to its high customer concentration and longer-term contracts with these customers.

“Hence, it tends to be able to maintain any changes to ASPs for a longer period compared with other glove makers which should help offset any sharp decline in ASPs in the event that industry ASPs begin to fall,” he added.

Aw expects from the upcoming 1QFY21 results onwards, Hartalega is able to record sequentially stronger profits, driven by higher ASPs, increase in production capacity and higher economies of scale.

As such, he has raised his FY21-23F earnings forecasts by 8.8% to 48.7%. Subsequently, his TP on Hartalega was raised to RM20, pegged to a 41 times CY21 price-earnings ratio (one standard deviation above its five-year mean).

While Hartalega is currently trading at higher valuations against its peers, Aw believes this is justified given its industry-leading technology in the nitrile glove space, higher operating efficiencies in terms of margin and leading position as the largest glove maker globally by market capitalisation.

Aw also reiterated his “add” rating on Hartalega.

The counter closed up 46 sen or 2.77% to RM17.06 on Friday (July 10), valuing it at RM57.8 billion.