Friday 29 Mar 2024
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The current share price is looking beyond its prevailing peak earnings and starts to price in recovery theme for this year upon massive vaccination.

KUALA LUMPUR (Jan 26): Hartalega Holdings Bhd’s earnings growth is expected to remain strong in 2021, according to investment analysts, but some of them have trimmed their target prices (TPs) considering the supply-demand conditions and average selling prices (ASPs) to normalise not far from now. 

Among the stockbroking firms that have revised down their TPs for Hartalega, which posted a record-breaking RM1 billion net profit for the third quarter ended Dec 31, 2020 (3QFY21), are Maybank IB Research, JF Apex Research and MIDF Research. Nonetheless, the revised TPs are still higher than the market price. 

Maybank IB Research, which maintains its "buy" recommendation, trimmed its TP to RM16.40 from RM20.60 previously, as it rolled forward its valuation base year to the financial year ending March 31, 2024 (FY24) estimates to better reflect a sustainable valuation in a balanced demand-supply environment.

“At our TP, the implied ex-cash PE [price-to-earnings] in FY24E is 39x (+1SD [standard deviation] to its five-year mean), similar to the level it was trading at before Covid-19. Dividend yield is (anticipated to be in the range of) 4%-8% in FY21E-FY22E,” said its analyst Lee Yen Ling.  

Lee expects Hartalega to achieve 50% quarter-on-quarter (q-o-q) growth in net profit for 4QFY21 due to higher ASP (circa +45% q-o-q). 

The analyst raises the estimate of earnings per share (EPS) for FY21 by 9%, however, she maintains the forecasts for FY22 and FY23. 

Despite the record-high quarterly net profit, Hartalega’s share price dropped 56 sen or 4.3% to RM12.44, bringing its market capitalisation to RM42.6 billion. A total of 4.67 million shares were traded.

Its peers Top Glove Corp Bhd’s share price also fell 32 sen or 4.9% to RM6.20, Kossan Rubber Industries Bhd lost 17 sen or 3.8% to RM4.33, while Supermax declined 35 sen or 5% to RM6.65. 

To recap, Hartalega reported that its net profit for 3QFY21 surged to a record high of RM1 billion, up nearly 84% against RM544.96 million in 2QFY21, meanwhile quarterly revenue grew from RM1.35 billion to RM2.13 billion, boosted by higher sales revenue which was boosted by bigger sales volume, hike in ASPs, lower energy and upkeep expenses.

JF Apex Research maintains a "hold" call on the nitrile glove manufacturer, and trimmed its TP to RM14.70, as it assigns lower PE of 30 times for calendar year 2021 (CY21) in view of window opportunity getting slimmer upon wide adoption of Covid-19 vaccines followed by incoming competition from new entrants which could pose a threat to the ASPs.

“Our valuation was lower than the average five-year mean P/E of 42.3x. We peg our valuation to CY21 instead of FY21 considering the impact of earnings normalisation in FY22F after exceptional strong profit growth in FY21F pursuant to the pandemic,” the research house said.

It said the market is forward looking and hence, it opines that the current share price is looking beyond its prevailing peak earnings and starts to price in recovery theme for this year upon massive vaccination.

“In view of our lower-than-expected forecasts (earlier), we lift our FY21F and FY22F net profit estimates by respective 11.1% and 20.8% by increasing our margin assumption coupled with higher sales volume upon full commission of Plant 7 [which will have annual capacity of 2.7 billion upon full commission],” it said.

Meanwhile, MIDF Research, which maintains a "buy" call, said it cut Hartalega’s TP to RM18.25 from RM22.96 previously, as the research house pegged the TP to 31 times FY22 forecast EPS of 58.9.

“The 31x PER is based on Hartalega’s 10-year mean, which we opine is more reflective of its long-term prospects. Previously, we ascribed it to 39x PER, which is 0.5SD above its long-term mean,” said its analyst Ng Bei Shan.

Nonetheless, MIDF believes that demand for rubber gloves will remain robust in the near-to-medium term as they are part of the essential personal protection equipment for frontline workers, thus it increased earnings forecast estimates for FY21 by 49% on further upside of ASPs.

Still, there are glove bulls who have raised TPs. These include RHB Research Institute and Hong Leong Investment Bank (HLIB) Research.

RHB keeps its "buy" call with a slightly higher TP of RM23.88 on higher net profit forecasts compared with RM23.50 previously, 84% upside with circa 4% FY21 (March) dividend yield.

“Looking ahead, 4QFY21 is set to rise, as its ASP uptrend has remained intact. On top of the spectacular earnings, we like the company for its gold standard in Covid-19 prevention among workers,” said RHB analyst Alan Lim.

HLIB Research maintains a "buy" call for the group with a higher TP of RM19.06 from RM18.35 based on 21.5 times PE multiple (-1.25 standard deviation below five-year mean) from 24 times previously.

“We note that ASPs rose drastically q-o-q (+58.2%). After factoring in higher ASPs going forward, our FY21/22/23 earnings forecasts rise by 4.9%/9.2%/1.4%,” said analyst Gan Huan Wen.

Edited ByKathy Fong
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