Hartalega’s future growth priced in

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This article first appeared in The Edge Financial Daily, on January 14, 2016.

 

Hartalega Holdings Bhd
(Jan 13, RM6.05)
Maintain hold with a higher target price (TP) of RM5.50:
The third quarter ended Dec 31, 2015 (3QFY16) net profit will be released on Feb 16, 2016, and we expect net profit of RM75 million to RM80 million (+24% to 32% quarter-on-quarter [q-o-q], +52% to 62% year-on-year [y-o-y]), driven by higher sales volume and higher US dollar/ringgit. This would lift nine months ended Dec 31, 2015 (9MFY16) net profit to RM198 million to RM203 million, within our expectations. Our TP is raised to RM5.50 (+15%) as we roll forward our valuation base year to 2017 on an unchanged target of 25 times price-earnings ratio (PER). Trading at 28 times 2017 PER, we think future earnings growth has already been priced in. We maintain “hold”. 

Hartalega’s new Plant 1 and 2 at its Sepang site will achieve full commercialisation in February 2016, boosting its total capacity to 22 billion pieces per annum. (+54% from 2014). We understand that the new capacity is already fully sold with new orders from existing and new customers in the developed markets (United States, Germany, United Kingdom and Japan), hence, supporting earnings growth in financial year ending March 31, 2016 (FY16). 

Additionally, Plant 3 and 4 (total capacity: plus eight billion pieces per annum; or +36% post Plant 1 and 2) will commercialise progressively from June 2016, with full commercialisation by June 2017. 

While the US dollar/ringgit appreciated 7% q-o-q and 27% y-o-y in 3QFY16, we think the margin expansion will be less prominent for Hartalega compared with its latex-skewed peers due to a higher US dollar-denominated cost with imported rubber (especially nitrile butadiene rubber) accounting for about 37% of total cost; speedier cost pass-through for nitrile gloves (versus latex gloves) given the competitive landscape; locked in foreign exchange for 10 months for one of its key customers. But, we understand that Hartalega aims to procure more latex locally and reduce the tenure of its sales contracts. 

We maintain our earnings forecasts, assuming the US dollar/ringgit rate of 4.10 in FY16 to FY18. Our TP is, however, raised to RM5.50 (+15%), as we roll forward our valuation to 2017 based on unchanged target PER of 25 times. —Maybank IB Research, Jan 13

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