HARTALEGA: Most Undervalued Currently. All research houses are badly wrong. TO BE CONFIRMED IN TODAY'S AGM

 

It gives me so much joy when I post an article early and people can make a lot of money after reading it. This was what happened with the Topglove article that I posted when Topglove was at RM7.20 and was still crashing. Many people have thanked me and you are most welcome. You just need to differentiate between those who are really passionate about the stock market and those who try to mislead others by using this forum - such as those who changes tune within a week from "Lame duck and sold it all" to "Best growth and recommend to buy"

Today, I will post on Hartalega. Since last Friday, all the glove stocks have rallied furiously, especially Supermax and Topglove but Hartalega has been lagging. The simple reason for this is that the foreast of all the research houses are badly wrong - the profit estimates (average of RM1.92 billion net profit forecast for FY 2022) is way too low.

When Hartalega reported their FY 2020 results (Revenue RM2.9 billion, PAT RM435million), their ASP for the year was around USD23/thousand gloves.

Based on management guidance on the % ASP increases, estimated ASP as of today would be at around USD60/thousand gloves. Also based on guidance on % ASP increases, ASP by the end of the year would be at around USD90/thousand gloves. These are also all contract prices and spot prices are much higher at around USD180/thousand gloves. Management also guided that all new capacity of 5 billion gloves coming in in 2021 would be sold at spot prices.

While management guided that ASP is expected to increase even more next year coupled with new capacity sold at spot prices, lets just assume (although unrealistic), for forecasting and valuation purposes, that ASP stays at USD90/thousand gloves until the whole of FY 2022. At ASP of USD90/thousand gloves, output of 40 billion gloves and USD/MYR exhange rate of RM4.1, Hartalega's FY 2022 revenue should be around RM14.8 billion. Raw material prices have been increasing 10% every month but raw materials only make up 35% of revenue as of FY 2020. At 10% increase every month for raw material, this should cost Hartalega an additional RM5.6 billion in FY 2022. The difference between the estimated FY 2022 revenue of RM14.8 billion and FY 2020 revenue of RM2.9 billion and increase in raw material cost of RM5.6 billion flows straight to PBT. That is (14.8 - 2.9 - 5.6 = RM6.3 billion).

So what will Hartalega's estimated FY 2022 net profit be? It should be approximately RM5.2 billion. This is derived by adding the additional Profit after Tax of RM4.8 billion (RM6.3 billion pre-tax, taxed at 24% tax rate) to the net profit earned in 2020 which is RM435 million.

How to value Hartalega?

I would remind everyone not to listen to someone in this forum who has not only been changing his target price many times but also his calls as the share prices of the glove counters fluctuate. For example, this person gave Topglove a target price of RM42 (post-bonus issue) per share based on a PE multiple of 20x. This looked very dumb after the crash in prices. He also called Supermax a lame duck when the price was crashing but then praised it as the best growth stock as the price increased over the last 2 days. For all those new entrants into the stock market, I would advise to ignore such people.

During periods where companies earn excessively wild profits, you need to decrease the PE multiple which the company historically trades at. You can't use the normal multiples which the company trades at historically - if you do, you will get dumb estimates like RM42.

Over the last 5 years, Hartalega has traded at an average PE multiple of 35x. As FY 2021 and FY 2022 profits are extremely high, it would be wise to cut the PE multiple by half to 17x when valuing Hartalega. At 17x PE, Hartalega should be valued at RM25.80 per share.

At RM13 per share now and with a profit of RM5.2 billion in FY 2022, what is the forward PE multiple of Hartalega now? It is 8.6x

At a forward PE multiple of 8.6x now versus the average of 35x over the last 5 years, Hartalega is excessively cheap and is a no-brainer buy. It is a matter of time before Hartalega's share price becomes more rational.

I will ask on the research houses' average profit forecast of RM1.9 billion versus mine of RM5 billion and also the ASP in today's AGM.


https://klse.i3investor.com/blogs/shareseatreasure/2020-09-15-story-h1513495819-HARTALEGA_Most_Undervalued_Currently_All_research_houses_are_badly_wron.jsp