Hartalega’s core earnings jump 27 percent

RHB Research reiterates ‘buy’ on Hartalega, with a higher DVF-derived RM 11.80 target price, with 29 percent upside and 2 percent yield.

According to the research house, Hartalega’s FY20 core earnings have met expectations with 4QFY20 core earnings showing significant improvement. In its trading notes today, it further points out that Hartalega’s FY21 outlook is extremely good due to tight demand-supply dynamics.

“Hartalega’s FY20 core net profit of RM 470 million met our expectation but beat consensus. Note that this makes up 99% and 103% of our and Street’s FY20F core earnings. We have excluded an unrealised FX gain and fair value loss on derivatives of RM 2 million and RM 37 million, which we deem as one-offs that are unlikely to recur,” RHB said.

The research house also estimated Hartalega’s 4QFY20 core earnings of RM 151 million  after excluding an unrealised FX gain of RM 7 million and fair value loss on derivatives of RM 42 million.

Although revenue declined by 2 percent with flattish QoQ volumes, core earnings have jumped 27 percent QoQ on significantly lower raw material prices.

On the demand side, RHB Research have factored in worse-than-expected Covid-19 spread globally, which should lead to higher gloves demand. This is due to the need to protect healthcare workers against the pandemic.

“On the supply side, Malaysia’s Movement Control Order (MCO) has slowed construction of new manufacturing plans. Under such market conditions, ASP rises are inevitable and will be across the board for all gloves companies,” the research house said.

Additionally, orders for the next 12 months is expected to not be an issue for Hartalega as the company’s plants’ utilisation rate is now almost fulla t 97 percent when compared to normal levels of 85 to 88 percent before Covid-19.

“We have increased our FY21F-22F earnings by 21-31%. In the short term, 1QFY21 core earnings should be much better, as this period reflects the full quarter of ASP increases. In the long run, Hartalega is a beneficiary of the long-term global uptrend in gloves consumption, 8-10% pa, even without Covid-19,” the research house said in its trading notes.


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