Hartalega Holdings - MARKET PERFORM

Hartalega announced on Friday that it will set up a nitrile glove manufacturing project (known as the Next Generation integrated Glove Manufacturing Complex - HNGC project) with a total annual capacity of 38b pieces p.a. by 2022. We understand that it will house 70 production lines with the ability to produce 40,000 pieces per hour, which is 60% above Hartalega’s current average production. Phase 1 of the project shall be funded via bank borrowings and warrants conversion, and will raise its current net cash position to a net gearing of 0.2x. However, we are maintaining our earnings for now as the new expansion will take some time (Phase 1 commences only in 2017). Our Target Price for the stock is also maintained at RM8.32 based on 12x FY13 EPS. Maintain Market Perform rating.

Setting up of a new rubber glove manufacturing project. It was announced on Friday that Hartalega NGC SB, a wholly- owned subsidiary of Hartalega, will be setting up a nitrile glove manufacturing project (known as  the Next Generation integrated Glove Manufacturing Complex - HNGC project). The project is expected to begin in 2013 and targets to complete by year 2021 at an estimated cost of RM1.5b.  It will consist of 70 new hightech production lines (vs. 45 lines currently) and has been accorded the Entry Point Project (EPP) status under the ETP.

Triple its current production capacity by year 2022.  We understand that the project will be divided into two 4-year phases. Phase 1 (from 2013-2017) will see the building of 40 production lines with a total annual capacity of 14.0b and in Phase 2 (from 2017-2021), there will be another 30 production lines  with  a  total  annual  capacity  of  10.5b  pieces  of  gloves  p.a. Hence, by 2022, Hartalega will triple its current capacity of 9.7b pieces to a total annual capacity of 38.0b pieces. It will house 70 production lines with the ability to produce 40,000 pieces per hour (vs. the average production rate of 22,000 pieces of gloves per hour), which will boost Hartalega’s production by 60%. 

Funding.  As at 31 Dec 2011, Hartalega has a net cash of RM165m and assuming a total capex of RM1.5b spread evenly over 8 years, we expect a capex of RM750m for Phase 1. This shall be funded via bank borrowings, and warrants conversion with a maximum proceeds of c. RM308.5m, supposing full exercise of 74m warrants at the exercise price of RM4.15 per warrant. This will turn its current net cash position to 0.2x net gearing. 

No earnings revision at the moment. We are maintaining our earnings for FY12 and FY13 as it will take some time before Phase 1 starts to operate in 2017.  Valuation. We maintain a 12x PER valuation on our FY13 EPS, which derives our current target price of  RM8.32 (ex-TP: RM3.12 on fully diluted basis) for Hartalega. Due to the limited upside of only 5% for the share price from its current level, we continue to maintain just a  Market Perform  rating on the stock.   

Source: Kenanga