This article first appeared in The Edge Financial Daily on March 27, 2020

Hartalega Holdings Bhd
(March 26, RM6.78)
Maintain underweight with an unchanged fair value of RM6.09: Our financial year 2020 (FY20), FY21 and FY22 earnings estimates for Hartalega Holdings Bhd are tweaked downwards by 0.6%, 1.2% and 1.5% respectively to account for delayed expansion plans during the movement restriction order (MCO) and higher finance costs resulting from a land acquisition announced yesterday. Contribution from the new expansion plans is only expected from FY23 forecast.

We like Hartalega for its long-term prospects underpinned by capacity expansion, product innovation and superior operating efficiencies. However, we believe its price-earnings is demanding at 41.4 times FY21 earnings per share.

On Bursa Malaysia, Hartalega announced it is purchasing a 95.1-acre (38.49ha) land in the Kuala Langat district from Bonus Essential Sdn Bhd (BESB) for a total cash consideration of RM263.1 million to be funded by internally generated funds and existing credit facilities.

The acquisition is in line with its growth plan following the expected completion of the existing next-generation integrated glove manufacturing complex (NGC) expansion in Sepang in 2021.

The parcel, around 20km from the existing NGC Sepang site, is expected to house seven plants with a total of 82 lines. This should bring in roughly 32 billion pieces of gloves per annum by 2029 or around four billion pieces per year.

The acquisition is expected to be completed in the second half of 2022 (2H22), with its first line expected to be commissioned in the same year. Hartalega expects to begin construction works in 2021 concurrently with the main infrastructure works — earth filling, an access road, two bridges and other utilities — to be completed by BESB.

We believe the price of around RM63.5 per sq ft is fair provided no further conversion costs to be borne by Hartalega, considering BESB will build the main infrastructure and the land size is customised. Quick checks showed industrial land in the region is valued at around RM50 to RM60 per sq ft.

Apart from that, the government has extended the MCO until April 14, during which construction works for Hartalega’s Plant 6 are halted. We’re now assuming a delay in contribution from Plant 6’s expansion by a month but we still expect all 12 lines to be fully commissioned by end-2020.

We expect Hartalega’s net gearing to increase to 10% in FY22 from 8% in FY20 resulting from the acquisition. — AmInvestment Bank, March 26