This article first appeared in The Edge Financial Daily on November 12, 2018
Hartalega Holdings Bhd
(Nov 9, RM6.30)
Maintain hold with an unchanged target price (TP) of RM6.30: Hartalega Holdings Bhd reported a 17% year-on-year increase in profit after tax and minority interests (Patmi) to RM245 million for the first half ended Sept 30, 2018 (1HFY19), tracking within our and consensus estimates (47% and 48% of respective forecasts).
The margin for earnings before interest, taxes, depreciation and amortisation (Ebitda) for the quarter was marginally lower due to higher raw material cost, but raw material prices have eased. Hence, we expect margins to improve in the coming quarters. Stronger earnings for 2HFY19 will also be underpinned by the commissioning of Plant 5 in the Next Generation Integrated Glove Manufacturing Complex expected by the end of FY19.
Patmi of RM120 million for the second quarter (2Q) of FY19 dipped 3.7% quarter-on-quarter, mainly due to a lower sales volume from its nitrile sales segment, which contracted 3.8% during the quarter. The reduction in volume was due to an adjustment in accordance with market demand, as we believe that management is focusing on protecting Hartalega’s margin rather than competing for volume growth. Ebitda per thousand gloves improved to RM24.23 in 2QFY19 from RM23.80 in 1QFY19. Due to the drop in volume, the utilisation rate also reverted to a more sustainable level of 88% from a high of 92% in 1QFY19.
Plant 5 (with an annual capacity of 4.7 billion pieces) was supposed to have been commissioned in 2QFY19, but this was delayed for two months as the company modified its lines to be Industry 4.0-ready. Management also guided that Hartalega is now back on schedule as it is adding two lines per month (for a total of 12 lines), and Plant 5 should be fully commissioned by the end of FY19. The completion of Plant 5 will increase its capacity by about 14%.
We have maintained our 12-month TP for Hartalega at RM6.30, based on an unchanged 35 times price-earnings ratio (PER) on our FY20 earnings per share estimate (+2 standard deviation [SD]). We have kept our “hold” rating as we believe the stock is fairly valued, trading at around +2SD its historical average PER. Supermax Corp Bhd (RM3.70; buy) and Kossan Rubber Industries Bhd (RM4.25; buy) have remained as our preferred sector picks. — Affin Hwang Capital, Nov 9