This article first appeared in The Edge Financial Daily on November 9, 2017

Hartalega Holdings Bhd
(Nov 8, RM8.30)
Maintain hold with a higher target price (TP) of RM7.32: We maintain our “hold” recommendation on Hartalega Holdings Bhd with a revised TP of RM7.32, based on 25 times forecasted calendar year 2018 (CY18F) earnings per share. 

We expect Hartalega to register a forecasted financial year ending March 31, 2018 (FY18F) to FY20F earnings compound annual growth rate of 26%, as improving demand and staggered capacity expansion offset slight margin compression from higher operating costs. We believe that its current valuations have priced in this growth potential.

Our forecasts for volume are higher than consensus as we expect the commissioning of the Next Generation Complex (NGC) Plant No 4, which is slated for the first half of CY18 (1HCY18), and NGC Plant No 5 by 1HCY19, to be on track. This is backed by its good track record and sufficient capacity growth.

We believe Hartalega will be able to secure sales for additional output, as shown by its decent second quarter FY18 performance where it recorded resilient volume growth. Any surge in demand for gloves will be a rerating catalyst for Hartalega as it has sufficient capacity to meet the incoming demand.

In our view, the earnings growth prospects from NGC have largely been priced in. Hartalega could face increased competition if other glove makers foray into the nitrile glove segment in a big way. This could reduce Hartalega’s lucrative margins. — AllianceDBS Research, Nov 8