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This article first appeared in The Edge Financial Daily on February 8, 2018

Hartalega Holdings Bhd
(Feb 7, RM11.50)
Downgrade to hold with a higher target price of RM11.47:
Hartalega Holdings Bhd reported a net profit of RM112.5 million for its third quarter of financial year 2018 (3QFY18) ended Dec 31, 2017. The quarterly net profit was flat, -0.8% quarter-on-quarter (q-o-q) and improved by +69.9% year-on-year (y-o-y). The group recorded a quarterly revenue of RM603.1 million, which increased by 3.2% q-o-q and 32.2% y-o-y. For the cumulative first nine months of FY18 (9MFY18) ended Dec 31, 2017, the group attained higher top line and bottom line of 38.1% and 66.4% y-o-y respectively. The group’s 9MFY18 net profit of RM322.5 million accounts for 79.8% of our full-year estimate and 75.4% of market forecast.

The group reported a higher revenue of RM603.1 million in 3QFY18 compared with RM584.6 million in the preceding quarter. The increase in revenue was mainly due to a 4% increase in sales. However, the group reported a lower profit after tax margin, -0.5 percentage point (ppt) in 3QFY18 compared with 2QFY18, due to a higher tax expense. Compared with 3QFY17, the revenue was higher in 3QFY18, representing an increase of 32.2%, mainly thanks to increase in sales volume of 36.2%. The group recorded a higher profit before tax (PBT) margin of +5.9 ppts, driven by foreign-exchange gain of RM6.9 million against a net loss of RM30.3 million in 3QFY17.

The continuous expansion in production capacity along with the increase in sales volume by 33.5% is the main factor contributing to a higher revenue of +38.1%. The increase in PBT margin of +4.1 ppts compared with 9MFY17 was due to foreign-exchange gain.

The group has declared a second interim dividend of four sen per share. The group has proposed a bonus issue of one bonus share for every one existing share with the entitlement date to be determined later. This is to reward shareholders and improve its share liquidity.

The prospects of the glove sector still remain strong with the switching of demand towards nitrile gloves. The group will continue to benefit from a supply shortage in China as vinyl glove producers still face difficulties in conforming with strict environmental law in China. Currently, the group has commissioned 10 production lines out of a total of 12. The construction of plant 5 is still ongoing and expected to be completed by the second half of calendar year 2018 to meet prevailing rising demand. The group aims to launch its new product antimicrobial gloves in Europe by the second quarter of 2018. It is working on securing US Food and Drug Administration’s approval to enter the US market.

We strongly believe that the group is able to achieve higher sales volume and margin in FY19 attributable to China market and the launch of new antimicrobial gloves. However, we foresee that the earnings in 4QFY18 to be flattish due to lower margin and foreign exchange loss from the sudden strengthening of the ringgit against the US dollar. We maintain our earnings forecasts for FY18F whilst upgrade our net earnings forecast for FY19 by 15% as we account for a higher sales growth due to the launch of anti-bacteria gloves during the second half of 2018 and a stronger demand following China’s district enforcement against polluting industries. — JF Apex Securities Bhd, Feb 7


 

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