This article first appeared in The Edge Financial Daily on August 5, 2019

Hartalega Holdings Bhd
(Aug 2, RM4.86)
Maintain buy with an unchanged target price of RM6.05: We expect Hartalega Holdings Bhd’s first quarter ended June 30, 2019 (1QFY20) earnings to improve quarter-on-quarter (q-o-q) due to a more favourable US dollar against the ringgit (USD/RM) rate and less intense competition in the market, as glove producers delay their capacity expansion plans.

The stock’s current valuation, at +0.1 standard deviation (SD), is attractive after a 32% decline from its peak — while the sector’s outlook remains robust.

Hartalega Holdings Bhd is expected to announce its 1QFY20 results in August. We expect 1QFY20 earnings to weaken year-on-year, mainly due to the high base effect of 1QFY19 (exceptionally high demand for nitrile gloves, due to the shortage of vinyl glove supply in the market).

Having said that, signs of earnings recovery should be seen in 1QFY20 earnings — with single-digit growth quarter-on-quarter.

The improvement can be attributed to a more favourable USD/RM and less intense competition in the market, as glove producers hold back on their capacity expansion plans. In 1QFY20, the US dollar appreciated against the ringgit by 1.2% to 4.132 by end-June.

Our foreign exchange strategist also believes that after the US’ Federal Open Market Committee’s recent meeting, the pace of US dollar decline will be extremely gradual.

In our view, Hartalega’s current valuation presents a rare opportunity to accumulate its stock at trough levels.

Its share price has weakened by 32% from its peak of RM7.20 on Aug 28, 2018.

Its forward price-earnings ratio (PER) has declined by 17 times (or 2.4SD) from the peak of 47 times (+2.5SD) to 30 times forward PER (+0.1SD) currently. In the previous earnings down cycle in 2016, its share price fell by about 30% (18 times forward PER and 2.4SD) from its peak, suggesting that the current share price downtrend has ended.

We maintain our earnings estimates for FY20 to FY22. Although 1QFY20 results should make up less than 20% of our full-year forecasts, this is within expectations.

Most of the earnings recovery should only be felt from 2QFY20 onwards, as the demand-supply equilibrium has emerged.

We continue to like Hartalega as it is a proxy for growing health awareness in the emerging markets. We expect glove demand to increase 8% to 10% per annum on low per capita consumption in China and India, at around six pieces per annum.

Risks to our call are industry overexpansion, weaker-than-expected sales volume, weaker-than-expected USD/RM and higher-than-expected raw material prices. — RHB Research Institute, Aug 2