Hartalega - MARKET PERFORM - Long term growth plan

By Kenanga Research
16 Apr 2012

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 wholeproject is planned for a total annual production capacity of 38b pieces p.a. by2021 (a long term CAGR in production of 16% from the current level of 9.7bpieces). We gather that management is currently applying for tax incentives onthe project cost, which would be an added bonus later as it would reduce the taxcharge 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 onthe 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 by15%-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 forecastsfor 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 thestock. 

Further details on the NGC. Following its announcement on the NGCproject, 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 intotwo 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 whilePhase 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 atotal 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 ofgloves per hour), bringing an hourly productivity boost of 60%. In total,Hartalega will see its annual production capacity rising to 38.0b pieces by2021  from the current 15.0b, translating into a 10-year CAGR of 15%. Management has identified the land for the NGCplant, 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 theproject cost, which would be an added bonus later as it would reduce the taxcharge on future earnings from the project, although this is not quantifiable at this moment until the incentives are finalised and approved by the MIDA. TheNGC will also house a new biomass renewable energy plant (with a total capacityof 58MW vs. the current Hartalega's plant capacity of 26MW), which will reducenatural gas consumption by 17% from 8.8sm''/1000 pieces to 7.4sm''/1000pieces. 

Valuation. We are maintaining our earnings forecasts for FY12 and FY13for Hartalega as the NGC project is more a long term blueprint growth plan forthe company with Phase 1 only to be completed in 2017. With our unchangedforecasts, our current Target Price (TP) is retained at RM8.32, based on 12xFY13 EPS. Hence, we maintain our Market Perform recommendation.

Price- RM7.96

Target price- RM8.32

[Source]