Hartalega announced that its wholly owned subsidiary Hartalega NSM (HNSM) has on 13th December 2022 entered into a sale and purchase agreement (S&P) with Northern Gateway Free Zone (NGFZ) for acquisition of 60 acres of land in Delapan Special Border Economic Zone (Delapan SBEZ) for RM54.3m. The land acquisition is expected to be completed by 12th July 2023, assuming all parties are able to meet the agreement within the time frame of 6 months.
More about NGFZ. NGFZ is a Malaysian company that primarily engages in property holding, real estate development, and other free zone-related activities. It is wholly owned by Northern Gateway (NGX), which is a wholly owned company by the Ministry of Finance Incorporated (MOF Inc).
NGX is the master developer of Delapan SBEZ and had obtained approval from the Malaysian government for the Free Commercial Zone and Free Industrial Zone status, as well as for all commercial and industrial activities within the Delapan SBEZ.
Note that land acquisition by Hartalega in Delapan SBEZ is not new as HNSM entered into an S&P agreement with NGFZ to purchase approximately 250 acres of NGFZ land back in March. However, the acquisition was lawfully terminated because the parties were unable to fulfil the conditions precedent within the time frame specified in the SPA.
Neutral on land acquisition. MIDF Research has reiterated its neutral stance on Hartalega as the land acquisition is to facilitate Hartalega’s mid-to long-term expansion plans. Nevertheless, expansion plans on the land is not disclosed.
Meanwhile, land acquisiton price of RM20.78 per square feet is slightly lower than the price valuation of RM21 per square feet in first land acquisition announced in 2021. The land acquisition will be funded by internally generated funds and/or the company’s existing credit facilities. Impact on balance sheet is marginal considering the group’s net cash position of
RM1.78 billion as of 2QFY23. It is estimated the net cash of Hartalega to decline from RM1.78 billion in 2QFY23 to RM1.73 billion post the land acquisition.
MIDF has upgraded Hartalega to NEUTRAL with a lower target price (TP) of RM1.68 (previously RM1.78). It makes no changes to its earnings forecast for FY23F-25F pending further details from management on expansion plan in SBEZ.
Meanwhile, the revised target price of Hartalega at RM1.68 is that the research house pegs FY24EPS of 7.13sen to a revised PER of 23.5x (previously PER of 25x), which is close to its most recent 2-years historical average.
Meanwhile, Hartalega is upgraded to Neutral from Sell due to limited downside and as the anticipated total return of +8.82% falls within the Neutral recommendation’s range of -10% to +10%.
However, MIDF remains cautious on outlook for Hartalega as it is wary that the oversupply of the glove would persist in 2023, mainly due to the aggressive capacity installation from both existing and new entrants during the pandemic; overstock conditions in the industry, as well as subsequent inventory adjustment that result in uneven demand-supply dynamics.
However, the group’s net cash position of RM1.78 billion can provide support against potential downside risk moving forward.
Whilst the upside risks identified are industry consolidation due to recent share price declines that have resulted in a low valuation; rising demand as big buyers replenish their inventories; supply-demand equilibrium with small players leaving the market or existing players ceasing some production lines.
