PETALING JAYA: Hartalega Holdings Bhd is set to benefit from an increase in average selling prices (ASPs) over the course of its current financial year, in view of the global glove shortage.
CGS-CIMB said in a report the company expected its glove ASPs to rise by 50% quarter-on-quarter in the third quarter of its current financial year ending March 2021, as well as a 40% quarter-on-quarter increase in the fourth quarter.
“Hartalega is also of the view that ASPs could still increase from the first quarter of 2022, given the current severe shortage in global glove supply.
“In our view, Hartalega’s ASPs will still lag behind its peers in the second quarter of 2022.”
CGS-CIMB said Hartalega believed that there would be a global shortage of 120 billion gloves annually for at least the next two years, due to higher demand from both healthcare and non-healthcare sectors, owing to the Covid-19 pandemic.
“Despite aggressive capacity expansion plans from both existing and new glove makers, demand is unlikely to be fully offset by the incoming new capacity.
“This is given difficulties in securing raw material supply, not having sufficient workforce, higher costs to comply with Act 446 (of the Workers’ Minimum Standards of Housing and Amenities Act 1990) and construction delays due to the ongoing pandemic.”
According to CGS-CIMB, Hartalega closed eight production lines (0.5% of total output) on Dec 15,2020, following the detection of 37 Covid-19 cases (0.4% positive rate) among 8,737 of its workers during precautionary mass testing.
“In our view, the impact was minimal as all eight lines resumed production on Dec 29,2020. Its ongoing Covid-19 prevention measures (costing RM2mil monthly) will see around 10% of its workforce being tested weekly.”
The research house added that Hartalega’s capacity expansion plans are still on track.
“Hartalega has commissioned the first three lines in Plant 7 (2.7 billion pieces per annum) at its next-generation Integrated Glove Manufacturing Complex (NGC), with the remaining three lines to be completed by end-2021.
“Piling works for NGC 1.5 (19 billion pieces per annum) have also begun, with plans to commission the first line from the third quarter of 2022 onwards. With both NGC 1.5 and NGC 2.0 (32 billion pieces per annum), Hartalega’s total capacity should rise to 95.1 billion by the third quarter of 2028 from 41 billion currently.”
CGS-CIMB said it is lowering its target price on Hartalega to RM19.50.
“Note that we peg Hartalega to its current five-year mean despite its robust earnings prospect, as we acknowledge that 2022 and 2023 could potentially be a one-off exceptional period.
“We still like Hartalega for its industry-leading technology in nitrile gloves, for being the beneficiary of strong global glove demand owing to the pandemic and higher-than-average margins in the sector.”