Tuesday 19 Mar 2024
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This article first appeared in The Edge Financial Daily on July 3, 2017

Hartalega Holdings Bhd
(June 30, RM7.38)
Reiterate outperform call with a higher target price (TP) of RM7.70:
Taking the cue from Hartalega Holdings Bhd’s fourth quarter ended March 31, 2017 (4QFY17) results, we expect the financial year ending March 31, 2018 (FY18) and FY19 net profits to register higher than our estimates.

Due to the solid volume growth in 4QFY17 and Hartalega’s persistent effort in expanding into other countries, we expect the utilisation rate for its Plant 3 at 88%, which is in line with its historical average.

Hartalega’s 4QFY17 profit after tax and minority interests (Patmi) came in at RM89 million (+35% quarter-on-quarter) underpinned by higher sales volume (+14%) as a result of full utilisation of Plants 1 and 2, and gradual commercialisation of Plant 3, and margin improvements due to the reduction of overhead operations and improvements in operational efficiency.

The earnings before interest, taxes, depreciation and amortisation (Ebitda) margin for 4QFY17 improved 5.2 points to 26.2% from 21% in 3QFY17.

Solid industry numbers and longer delivery lead times are indicating that demand will outstrip supply at least over the medium term.

Case in point is 1QFY17 when total exports of rubber gloves, synthetic rubber (SR) and latex-based natural rubber (NR) combined rose an estimated 10% year-on-year.

Furthermore, Hartalega has managed to penetrate into new markets of which it is currently in more than 50 countries compared with about 30 in the past which has further reinforced solid demand.

We understand that robust demand for nitrile has led to longer delivery lead times.

Looking ahead, due to pent-up demand for rubber gloves, Plants 1 and 2 are presently fully utilised. Correspondingly, we expect the new capacity from the gradual ramp-up of Plant 3 to boost earnings in subsequent quarters. We expect volume sales to surge following lower average input latex cost in tandem with falling raw material latex prices.

Presently, its Next Generation Integrated Glove Manufacturing Complex (NGC) has commissioned all 24 lines of Plants 1 and 2 combined. Plant 3 will add about four billion pieces (+18%) in terms of new capacity and provide the much-needed boost to FY18 earnings. In anticipation of higher demand, we expect Hartalega to start building a new plant.

We raise our FY18 and FY19 net profit forecasts by 18% and 15% respectively to take into account higher volume sales (+20% growth rate compared with 16% previously) and a utilisation rate of 88% compared with 82% previously underpinned by Plant 3.

Correspondingly, we upgrade our TP from RM6 to RM7.70 based on 29.5 times calendar year 2018 revised earnings per share (EPS) (+1 standard deviation above the four-year forward mean).

Apart from higher earnings, we raise our target price-earnings ratio (PER) from 26.5 times to 29.5 times. The stock has been trading at a PER of between 22 times and 35 times over the past four years. — Kenanga Research, June 30

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