Hartalega - MARKET PERFORM - Long term growth plan

We attended Hartalega’s analysts briefing last Friday on its new Next Generation integrated Glove Manufacturing Complex - NGC project) and remain positive on the company’s prospects. The whole project is planned for a total annual production capacity of 38b pieces p.a. by 2021 (a long term CAGR in production of 16% from the current level of 9.7b pieces). We gather that management is currently applying for tax incentives on the project cost, which would be an added bonus later as it would reduce the tax charge on future earnings from the project, although this is not quantifiable at this moment until the incentives are finalised and approved by MIDA. 

We are on the overall positive on the NGC project but note that it is more of a long term blueprint growth project to ensure that the company would still be able to grow its earnings by 15%-20% over the longer term (the first phase is to be completed in 2017 only). Hence, for the immediate term, we are still maintaining our earnings forecasts for FY12 and FY13, which should see the earnings growing by 12% and 19% respectively. With our unchanged forecasts, our current Target Price for the stock is retained at RM8.32, based on a PER valuation of 12x to its FY13 EPS. With total returns upside of 8%, we maintain a Market Perform rating on the stock. 

Further details on the NGC. Following its announcement on the NGC project, Hartalega held an analysts briefing last Friday to give further details on its new manufacturing project known as the Next Generation integrated Glove Manufacturing Complex -NGC project).  To recap, the project will be divided into two 4-year phases over the next 8 years. Phase 1 (from 2013-2017) will see the building of 40 production lines with a total annual capacity of 14.0b while Phase 2 (from 2017-2021) will see another 30 production lines set up with a total annual capacity of 10.5b pieces of gloves p.a. The project will hence see a total of 70 production lines constructed with the ability to produce 40,000 pieces per hour (vs. the current average production rate of 22,000 pieces of gloves per hour), bringing an hourly productivity boost of 60%. In total, Hartalega will see its annual production capacity rising to 38.0b pieces by 2021  from the current 15.0b, translating into a 10-year CAGR of 15%. Management has identified the land for the NGC plant, which will be situated in Sepang on a land size of 112 acres. 

Tax incentives?  Furthermore, we gather that management is currently applying for tax incentives on the project cost, which would be an added bonus later as it would reduce the tax charge on future earnings from the project, although this is not quantifiable at this moment until the incentives are finalised and approved by the MIDA. The NGC will also house a new biomass renewable energy plant (with a total capacity of 58MW vs. the current Hartalega’s plant capacity of 26MW), which will reduce natural gas consumption by 17% from 8.8sm³/1000 pieces to 7.4sm³/1000 pieces. 

Valuation. We are maintaining our earnings forecasts for FY12 and FY13 for Hartalega as the NGC project is more a long term blueprint growth plan for the company with Phase 1 only to be completed in 2017. With our unchanged forecasts, our current Target Price (TP) is retained at RM8.32, based on 12x FY13 EPS. Hence, we maintain our Market Perform recommendation.

Source: Kenanga