Hartalega Holdings - MARKET PERFORM

Stock Name: HARTA
Company Name: HARTALEGA HOLDINGS BHD

Research House: KENANGA

Price Call: BUY

Target Price: 8.32

Hartalegaannounced on Friday that it will set up a nitrile glove manufacturing project(known as the Next Generation integrated Glove Manufacturing Complex - HNGCproject) with a total annual capacity of 38b pieces p.a. by 2022. We understandthat it will house 70 production lines with the ability to produce 40,000 piecesper hour, which is 60% above Hartalega's current average production. Phase 1 ofthe project shall be funded via bank borrowings and warrants conversion, andwill raise its current net cash position to a net gearing of 0.2x. However, weare 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 alsomaintained at RM8.32 based on 12x FY13 EPS. Maintain Market Perform rating.

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

Triple its current production capacity by year2022.  We understand that the project will bedivided into two 4-year phases. Phase 1 (from 2013-2017) will see the buildingof 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 piecesto a total annual capacity of 38.0b pieces. It will house 70 production lineswith the ability to produce 40,000 pieces per hour (vs. the average productionrate of 22,000 pieces of gloves per hour), which will boost Hartalega'sproduction by 60%. 

Funding.  As at31 Dec 2011, Hartalega has a net cash of RM165m and assuming a total capex ofRM1.5b spread evenly over 8 years, we expect a capex of RM750m for Phase 1. Thisshall be funded via bank borrowings, and warrants conversion with a maximumproceeds of c. RM308.5m, supposing full exercise of 74m warrants at theexercise price of RM4.15 per warrant. This will turn its current net cashposition to 0.2x net gearing. 

No earnings revision at the moment. We are maintaining our earnings forFY12 and FY13 as it will take some time before Phase 1 starts to operate in2017.  Valuation. We maintain a 12x PERvaluation 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 fromits current level, we continue to maintain just a  Market Perform  rating on the stock.   

Source: Kenanga