This article first appeared in The Edge Financial Daily on September 20, 2018
Hartalega Holdings Bhd
(Sept 19, RM6.59)
Maintain sell with an unchanged target price (TP) of RM4.90: Hartalega Holdings Bhd’s management believes the global demand for rubber gloves would remain robust, growing at an average of 6% to 8% per annum for 2019, driven mainly by developing nations where existing per capita consumption is significantly lower than developed countries. In terms of pricing, management expects the average selling price (ASP) of nitrile gloves to remain stable for the year. We note that over the last 6 months, the group raised the ASP higher by more than 15%. As a result, it faced some resistance from customers and we believe this will be reflected in FY19 earnings in terms of lower earnings before interest, taxes, depreciation and amortisation and profit before tax margins. Positively, the response to Hartalega’s latest Anti-Microbial Gloves (AMG), which command a higher selling price of around 2% to 5%, has been overwhelming from the European market. The group is expecting to receive US Food and Drug Administration’s export approval for the US market by late-1H19 (first half of 2019). To recap, the AMG gloves features efficacy in killing 99.999% of germs that come into contact with the glove’s outer surface in less than five minutes and this is without leaving traces of anti-microbial activity in the area of contact.
On the US trade tariffs front, we note that the previous list reported by the United States Trade Representative which covers medical gloves has been removed. This is in line with our view that medical gloves should be exempted from tariff as it is a necessity in the healthcare industry. As such, we believe manufacturers like Hartalega, which produces mainly medical gloves, would not be affected by the tariff.
For FY19, the group is expected to fully ramp up Plant 5 (4.7 billion gloves/annum), which was commissioned in August. The management indicated that the group will commission two new lines every month. For Plant 6 (4.7 billion gloves/annum), construction has started and is on track to meet the completion deadline in 1H19. Upon full commissioning of Plant 5 and 6 in 2H19, Hartalega’s enlarged rubber glove capacity is expected to increase by 14.2% to 37.7 billion gloves/annum. Beyond 2019, earnings growth is expected to come from Plant 7 (2.6 billion gloves/annum), which will concentrate on specialty products, that is surgical, extended cuff and high-risk gloves.
We do not see any major impact on earnings from the increase in minimal wage of RM50 to RM1,050 per month, effective Jan 1, 2019. We note that the labour cost accounts for around 11% of total production costs. Hartalega currently has around 8,000 workers, where foreign workers consist of around 75%. We believe the group has more than enough time to reprice its exports to cover the cost increase to customers. Besides that, strengthening of US dollar will partially help to mitigate the cost increase.
Besides that, we also note that nitrile butadiene prices have been on an increasing trend lately to around US$1.40/kg from US$1.10/kg in 2017. Our sensitivity analysis suggests a 2.5%-point impact on margins for every 5% change in raw material prices if the group fails to pass through the cost increase. In our forecast, we have assumed nitrile butadiene price of US$1.35/kg for FY19.
No change to our earnings estimates. Our TP for Hartalega is unchanged at RM4.90/share. — TA Securities, Sept 19