KUALA LUMPUR: AmInvestment Research is maintaining its hold recommendation on Hartalega Holdings with a lower fair value of RM11.20 (previously RM13.56) while lowering the earnings estimates. The research house said on Thursday its valuation was based on 25 times CY22F EPS, which is at a one-year standard deviation discount of the five-year historical average. “This is in view of the faster-than-expected rollout of global vaccinations as well as rapid capacity expansions by Chinese glove manufacturers, ” it said. On Wednesday, Hartalega announced it was acquiring 250 acres of land in Bukit Kayu Hitam, Kedah from Northern Gateway Free Zone Sdn Bhd (NGFZ) for RM229mil. It has also signed an option agreement to purchase another 130 acres of land in the same location. Hartalega stated this will be part of the company’s growth plans towards 95bil pcs/year by 2027. Its existing NGC 2.0 developments may either be delayed or run concurrently. “Assuming NGC 2.0 plans are deferred, the Kedah expansion will increase annual production capacity by 80bil pcs per annum (totalling around 143bil per annum), ” it said. The group plans to invest RM7bil to build 16 new plants over the next 20 years, with roughly 12 lines per plant. On the land purchase, AmInvest Research said the acquisition is expected to be completed by March 2022, with the first plant set to be completed by CY2024. The acquisition will be funded by internal funds and existing credit facilities. “We reckon Hartalega will be able to finance the acquisition without corporate exercises given its net cash position, backed by strong FY21 to FY22 earnings, ” it said. AmInvest Research still likes Hartalega for its product innovation and superior operating efficiencies. However, it expects the glove average selling prices (ASPs) to decline post-Covid-19 as glove urgency wanes. The likelihood of this happening grows each day given the rapid rate of vaccination in countries such as the UK and US. “Additionally, we express our concerns on potential competition by China glove manufacturers Intco and Blue Sail. They are slated to reach 120bil and 76bil annual production capacity by end-2022 respectively. “Although we remain positive that the demand for gloves will remain stable post-Covid-19, China manufacturers may eventually provide direct competition if they continue expanding at their current rate, ” the research house said. AmInvest Research reduced its FY21E, FY22F and FY23F earnings estimates by 0.4%, 0.4% and 1.1% respectively to account for higher finance costs resulting from the land acquisition. It added contributions from the new expansion plan is only expected from FY24F onwards.
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