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This article first appeared in The Edge Financial Daily on April 19, 2019

Hartalega Holdings Bhd
(April 18, RM4.73)
Upgrade to buy (previously hold) with a lower target price (TP) of RM5.33 (previously RM6.12):
We met with management for updates on Hartalega Holdings Bhd. We expect a soft fourth quarter of financial year 2019 (4QFY19) due to: i) foreign exchange impact; ii) a minimum wage hike; and iii) competitive pressures on average selling prices (ASPs) translating into anaemic volumes. Consequently, we have revised our FY19 to FY21 earnings estimates downward by 4.4%. Post earnings revision, our TP has decreased to RM5.33 (from RM6.12); we have also revised our price-earnings ratio forecast to 33.7 times (+0.5 standard deviation above the three-year mean). We upgrade our rating to “buy” on valuations (trading below its three-year mean) as we believe the share price weakness has now offered sufficient buffers.

The following are some of the key takeaways from the meeting with management. The nine months of FY19 revenue of RM2.14 billion (+19.9% year on year [y-o-y]) translated into a core profit after tax and minority interests of RM367.1 million (+13.7% y-o-y). Volume improved on the progressive commissioning of Plant 5 (+3% quarter on quarter [q-o-q]; +11.6% y-o-y), while ASPs softened during the quarter (-2% q-o-q; +6.4%  y-o-y) due to a decline in nitrile prices and competitive pressures.

The commissioning of the first lines of Plant 6 (4.7 billion pieces per annum [pa]) which was earlier guided for the first half of calendar year 2019 (1HCY19) has now been pushed forward to 2HCY19. We view this in a positive light and in line with other industry players (Top Glove Corp Bhd), which should aid in the alleviation of ASP pressures. Factory 5 which has two lines to go is being commissioned at a rate of one line per month from two lines a month.

Next Generation Integrated Glove Manufacturing Complex 1  (NGC-1) will culminate in Plant 7 (2.6 billion pieces pa — specialty gloves) which has been guided to commence construction in mid-2019 with targeted commissioning of the first line by January 2020. We understand that concurrently, management is on the prowl for a parcel of land for NGC-2 (the minimum size requirement is about 80 acres or 32.37ha). We do expect an announcement sooner than later on this, given that it is a crucial determinant for the group to sustain its multi-year earnings growth momentum.

We understand that Hartalega’s antimicrobial gloves (AMGs) are still awaiting Food and Drug Administration (FDA) approval. The approval process is lengthened given that the FDA views AMGs as a new product category. We expect contributions from AMGs to be miniscule for FY20 before pace picks up post FDA approval expected in the latter part of FY20. — Hong Leong Investment Bank Research, April 18

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