Friday 29 Mar 2024
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Hartalega Holdings Bhd
(Feb 6, RM7.55)
Maintain hold with an unchanged target price of RM7.
We met up with Hartalega Holdings management to get updates on the group’s expansion plan and management’s view on the group’s outlook.

Operations of Hartalega’s Next Generation Integrated Glove Manufacturing Complex (NGC) in Sepang, Selangor was commissioned in early January, a slight delay of two months from the initial schedule owing to the delay in utilities infrastructure implementation.

We understand that two production lines have come into operation while the management is looking at operating the third production line by this month. Under the master plan, the NGC will house 72 production lines with a total annual production capacity of 28.5 billion gloves which will essentially triple the group’s current production capacity by the year 2020.

Being the world’s largest nitrile gloves manufacturer, the management noted that the prices of its key raw material — nitrile latex — is still exhibiting weakness in the near term due possibly to the sluggish tyre industry in China and weak sentiment towards crude oil prices.

Meanwhile, natural latex prices remain subdued by consolidating at its multiple-year low level. We expect the low raw material prices to bring cost savings to the group in the near term.

The average selling prices of gloves have been on the downtrend, mainly to account for declining raw material prices. Yet, the heightened competition among glove players has also exerted downward pressure on pricing, where glovemakers priced their gloves competitively in order to maintain or gain market share. We do not expect price competition to turn softer in the near term in view of the increasing supply of gloves in 2015 following capacity upgrades by the glovemakers.

On the strengthening of the US dollar against the ringgit, the management expects minimal earnings impact for the financial year 2015 (FY15) as it has hedged against the US dollar. Meanwhile, the management expects the positive earnings impact from the stronger US dollar to be more visible in FY16 as sales are largely US dollar-denominated, and hence revenue will be boosted upon converting the US dollar to ringgit.

We lowered our earnings forecast for FY15 and FY16 by 5.6% and 16.9% respectively to factor in the high start-up cost for the NGC and lower selling prices of gloves. Earnings to take a breather in FY15 before recovering in FY16.

We estimate that the earnings of the group will take a breather in FY15 in the absence of new significant production capacity and higher operating cost. Nevertheless, we reckon that the significant production capacity expansion in the NGC will boost the group’s bottom line in FY16. — JF Apex Securities, Feb 6

Hartalega_9Feb15_theedgemarkets

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

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