Hartalega Holdings Bhd
(July 8, RM8.97)
Maintain buy with a fair value of RM9.40: According to its filing with Bursa Malaysia, Hartalega Holdings has proposed to undertake a bonus issue on the basis of one bonus share for every existing ordinary share (one-for-one), at an entitlement date to be determined later.

The bonus issue will be implemented by capitalising up to RM410.2 million from the group’s share premium and retained earnings accounts.

Upon completion (tentatively in the third quarter of 2015), this exercise will double the group’s outstanding number of shares from 820.4 million to 1,640.9 million and raise its share capital to RM820.4 million.

This is Hartalega’s third bonus issue since its listing on Bursa in 2008. In 2010, the group had announced a two-for-one bonus and in 2012 it declared a one-for-one bonus together with free warrants on a one-for-five basis. The warrants expired on May 29, 2015 and were subsequently delisted on June 1, 2015.

While a bonus issue would not have an impact on Hartalega’s valuations/fundamentals (that is, not value accretive to shareholders), it should improve the stock’s trading liquidity and further enhance its appeal. As such, we expect a further bounce to the group’s share price in the short term on positive investor sentiment.

Year-to-date (YTD), the stock has gained 23%, outperforming the FBM KLCI by 26 percentage points. This is in line, albeit at a smaller quantum, to its peers’ YTD average growth of 40%.

The strong share price performance of the rubber glove players can be in part attributed to the sharp appreciation of the US dollar/ringgit exchange rate (YTD: +9%).

Looking ahead, we maintain our view that the progressive commissioning of the Next Generation Integrated Glove Manufacturing Complex (NGC) will provide fresh growth impetus to Hartalega’s earnings.

With low average selling prices continuing to spur global glove demand, management is confident of an earnings rebound in financial year 2016 (FY16) to FY18 as new capacity from its NGC plants progressively comes onstream.

We make no change to our “buy” call on Hartalega and our FY16 to FY18 earnings estimates. Our fair value of RM9.40 per share, based on an FY16 forecast price-earnings ratio of 27 times, is also unchanged. — AmResearch, July 8

This article first appeared in The Edge Financial Daily, on July 9, 2015.