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Hartalega
came out very strong during the recent AGM. What I like about
Hartalega's message is the confidence it gives to the shareholders and
market including their statement when asked on analyst earnings forecast
:
KUALA
LUMPUR (Sept 16): Hartalega Holdings Bhd, which expects an additional
demand for 120 billion pieces of disposable gloves in the next three
years, does not foresee any sharp earnings contraction after 2021 as
some analysts anticipate.
"The analysts are
correct [on the earnings forecasts]. But when it comes to the third
year, after 2021, they start to give us [earnings] contraction... and
[it's] a very sharp contraction.
"I mean this
is an opinion, right? They can be right at the end of the day. I do not
know. But by my guidance, what the analysts have said cannot be right,"
Hartalega's executive chairman Kuan Kam Hon told the media after the
group's annual general meeting yesterday when asked to comment on
analysts' earnings forecasts.
"We are on the
ground. We have been in the business for the last 30 years and analysts
are not able to see what we are able to see," he added.
This
has been a strong point of contention in the markets between two camps -
those who believe in the glove story and those who don't. Particularly,
this is especially poignant when this concern was highlighted by 3
research houses namely JF Apex, Ambank and Macquarie. The 3 of this
relied on this fact to give justification for their bleak outlook of the
sector. So which is which? Is Mr Kuan, the industry titan correct or
the analysts?
Lets have a look at this 3 minutes long video below from the AGM which gives a very good flavour :
As
mentioned before, for a stock to go up and share price to rally, the
majority of market participants must believe in the story in order for
the buying momentum to outweigh the selling momentum. I have written
extensively on glove stock and the sector so I wont repeat what was
shared earlier.
I
would like to take the opportunity to zoom in and focus on Hartalega
following the AGM. The few key takeaways which convinced me to consider
Hartalega to be my 5th Long Term Value Pick are as below :
1. The visibility of earnings for the next 2-3 years minimum. Please note I am not citing the lock in committed order of 18-20 months. But potentially 3 years - 36 months. The issue here is no longer about ASP and deposit paid for locked in order. It is the issue of structural change in demand due to hygiene practice resulting in continuous shortage of supply against demand.
1. The visibility of earnings for the next 2-3 years minimum. Please note I am not citing the lock in committed order of 18-20 months. But potentially 3 years - 36 months. The issue here is no longer about ASP and deposit paid for locked in order. It is the issue of structural change in demand due to hygiene practice resulting in continuous shortage of supply against demand.
2.
Management years of experience as pioneer and market leader carries
more weight than analyst. Some owners of companies' are promotional and
lack credibility. Not the Kuan family. They are known to be hardworking,
humble and ethical in their conduct of business. This is the market
reputation and street credentials. This is what I value most in a business. Strong management running a quality business.
3. The expansion and succession plan are all in place.
By his side, Mr Kuan junior demonstrate eloquence, stability and
knowledge. Furthermore, with NGC 2.0, by 2027, the group's total annual
installed capacity shall increase to 95 billion pieces per annum. As
shareholders what we like to see is both expansion for growth and
succession for stability. This will allow us to decide the investment
horizon to longer term.
4. Premium
valuation. Don't get me wrong, I am not recommending to buy stocks at
expensive valuation. What I meant is, the market will always accord
premium valuation to companies which are fantastic. Paying a fair price for a wonderful business is more important than paying a cheap price for a good business.
Currently, if we compare to others, Hartalega is no longer trading at a
huge premium unlike before Covid-19. In fact, if you were to consider
Hartalega now, you are investing in this good business at a fair price
with strong outlook and growth prospects. Top Glove and Supermax are the
earliest to hike their ASP significantly. Hartalega, Kossan and
Riverstone hiked the ASP much later as they value long term business
relationship and committed to earlier pre-Covid 19 ASP. Hartalega and
Kossan both has recently indicated that for future quarters, they will
be hiking ASP significantly in the range of 30-50%. This leaves room for
imagination on their potential upside.
5. Prominent substantial shareholders including their major client Medline Industries Inc. As
per the latest list of 30 largest shareholders in the 2020 annual
report, we can spot big names like Great Eastern, AIA, GIC, EPF, Norges
Bank, Vanguard Emerging Market Index Fund, Australia Employees
Superannuation Trust, Prudential amongst others. Big names aside, what
impressed me most, is the fact that Medline Industries Inc from US which
is one of the biggest privately held manufacturer and distributor of
medical supplies is the 7th largest shareholder of Hartalega. Just
imagine, if your major client have so much faith in you that they want
to take a stake in your company. That not only signifies confidence the
company but also rightly guarantees continuous order flow. Your client
essentially ties his interest with the company and believe in growing
hand in hand for the long term.
6. Hartalega is steadfast to remain the world leader along with other Malaysian glove makers.
Be it China or the new entrants recently announced in the news, in my
view, will not be a substantial threat to the Big 6 players. This is
because of their ability to deliver, capacity, R&D & technology
innovation.
Let me cite this example,
Hartalega came up with the Anti-microbial gloves which is the first in
the world. It is now pending approval with the FDA and in our view, it
is a game changer that cements their leadership position in Nitrile
Gloves. We must remember, to be a leader, capacity is not the only
metric. Technology and innovation are key to ensuring you maintain your
pole position. From a 2018 news report, Hartalega spent US$10 million in
R&D on this gloves with Chemical Intelligence UK. This is before
the pandemic. With heightened awareness, this product of Hartalega will
differentiate them from other industry players.
Comparing
to my past writing on Long Term Value Picks, this time it is slightly
different. The reason is because I have covered extensively on glove
stocks and sectors which you can read from my earlier posts. For me,
when all is said and done, when choosing a long term stock to be in your
portfolio for many years, it must meet my 5 metrics :
1. Strong, honest and capable management team / owner
2. Consistent Growth, Earnings & Dividend payout
3. Strong balance sheet & cash position / cash flow
4.Can hold across decades / generations without risk of delisting or bankruptcy
5. Undervalued & lack of appreciation from investors
At this juncture, Hartalega meets all the metrics.
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Food for thought:
https://klse.i3investor.com/blogs/tradeview/2020-09-19-story-h1514207235-_Tradeview_2020_Long_Term_Value_Pick_5_Hartalega_Holdings_Berhad_5168_T.jsp
