KUALA LUMPUR (Oct 27): Hartalega Holdings Bhd, which was among the top gainers, saw its share price surged as much as 6.45% or RM1.14 to RM18.82 in the afternoon trade after the group announced that its net profit soared 425% to a record RM544.96 million in the second quarter ended Sept 30, 2020 (2QFY21).
At the closing bell, the stock pared some gains to settle at RM18.28, but it was still up by 60 sen or 3.39%, after some 9.88 million shares were traded.
It stayed mostly in positive territory throughout the entire trading session after it opened 0.45% or eight sen lower at RM17.60 from yesterday’s closing price of RM17.68.
At the current closing price of RM18.28, the glovemaker is worth RM62.93 billion.
Hartalega attributed its best-ever quarterly net profit, which is five times higher than the RM103.87 million posted in 2QFY20, to higher sales revenue, higher average selling price, lower material costs and better production efficiency.
Earnings per share surged to 15.95 sen versus 3.09 sen previously. Meanwhile, quarterly revenue jumped 89.73% to RM1.35 billion from RM709.42 million a year ago.
For the cumulative six-month period of FY21 (6MFY21), net profit skyrocketed by a whopping 286.34% to RM764.68 million, from RM197.93 million last year, while revenue rose 67.92% to RM2.27 billion from RM1.35 billion.
Malacca Securities Sdn Bhd analyst Kenneth Leong commented that Hartalega’s net profit for 2QFY21 exceeded his expectations as it accounted for 66.5% of his previous earnings estimate of RM1.15 billion for the financial year ending March 31, 2021 (FY21).
Going forward, he expects the company’s earnings growth to sustain over the subsequent quarters, thanks to the elevated average selling price (ASP) of rubber gloves.
“With the reported earnings coming above expectations, we raised our earnings forecast by 61.9% and 84.3% to RM1.86 billion and RM2.12 billion for FY21 and FY22, respectively to account for the higher-than-expected ASPs,” he said in a note today.
Consequently, Leong has upgraded the recommendation for the stock to “buy”, from "hold" previously, with a higher target price of RM23.34, versus RM18.44 from earlier estimates.
The target price is derived from a targeted price-earnings ratio (PER) of 43 times the company’s FY21 earnings per share of 54.3 sen. The target PER is also in line with the five-year historical forward average.
With the number of new Covid-19 cases across the globe on the rise, Leong reckoned that demand for gloves will be sustainable throughout the financial year ending March 31, 2021 (FY21) and potentially till FY22.
He also noted that the elevated demand for gloves has brought customers' stock holdings down to two to three weeks, as opposed to two to three months pre-Covid-19.
“Meanwhile, [the Malaysian Rubber Glove Manufacturers Association] expects the Malaysian rubber glove exports to jump to 220 billion pieces of gloves valued at RM21.80 billion in 2020 (up from 170 billion pieces valued at RM17.40 billion in 2019) which accounts [for] about two-thirds of the global supply. Already, the first seven months of the year saw glove exports rose 50.1% year-on-year to RM5.06 billion,” he added.
Previously, the market consensus forecast for Hartalega's annual profit for FY21 was RM1.32 billion. Hence, Hartalega's 6MFY21 net profit of RM764.68 million accounted for 58% of full-year earnings estimates.
Now, the market consensus on Hartalega's expected annual profit is at RM1.99 billion for FY21, higher than RM1.32 billion previously.
Post-revision, this means Hartalega's 6MFY21 net profit only accounted for 38.4% of the full-year earnings consensus. In order to meet the market consensus, Hartalega will need to deliver an average of RM612.5 million for the next two financial quarters.
Kenanga Research, which has an “outperform” rating for the stock with an unchanged target price of RM26.22, is optimistic on the company’s outlook and has also raised its net profit forecast for Hartalega.
It anticipated the company to generate a net profit of RM2.89 billion for FY21 and RM5.07 billion for FY22, after raising its earnings forecasts by 45% and 106% respectively, according to its note dated Oct 14.
It said the earnings growth will be premised on higher ASPs for gloves, from US$41 to US$43 per 1,000 pieces to US$50 to US$65 for FY21 and FY22. Thus, its earnings before interest, tax, depreciation and amortisation (Ebidta) margin is expected to grow to 51% in FY21 and 60% in FY22, from 42% each for FY20 and FY21.
According to Bloomberg, Hartalega is covered by 21 analysts, with 15 of them having "buy" calls and six having "hold" calls. The 12-month consensus target price is RM22.49.