Analysts optimistic on Hartalega’s medium, long term prospects
KUCHING: Analysts are collectively optimistic on Hartalega Holdings Bhd’s (Hartalega) prospects for the mediumto-long-term, although they believe the group may face some minor setbacks in the short term.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), with Hartalega’s existing plants running at optimum capacities, sales volumes will remain relatively flattish at least until the third quarter of 2015 (3Q15).
“However, management reiterated that 4Q14 margins are expected to sustain in subsequent quarters and start improving once the Next Generation Integrated Glove Manufacturing Complex (NGC) plant 7 begins commercial production due to economies of scale,” the research arm noted.
On the NGC expansion plans, Kenanga Research observed that they are on track. Hartalega had highlighted its NGC is on track to commission operations gradually from October 2014 onwards with a planned commissioning of two lines per month.
Upon full commissioning, the research arm noted that the first two plants will add circa eight billion pieces (+56 per cent) new capacity by October 2015 and providing the much-needed earnings growth for financial year 2016 (FY16).
“Hartalega appears relatively confident that capacities for the first plant will be absorbed upon commissioning. We understand that a major client has been found to take up a sizeable portion of the first plant production,” Kenanga Research observed.
Industry-wise, it noted that Hartalega expects double-digit demand growth for nitrile gloves (15 to 20 per cent for 201415 and 10 to 15 per cent for 2016-18) and to preserve market share once the new capacities come on-stream from October 2014 onwards.
The research arm further noted that as recent gas price hike translates into a small one to 1.5 per cent average selling price (ASP) hike for full passthrough but with the short lead time between announced new rates (mid-April) and effective date (May 1), the revised ASPs will only apply to orders from June onwards, resulting in Hartalegaalega ‘absorbing’ this incremental cost only from May.
“We are downgrading our FY14 and FY15 earnings forecasts by 10 to 12 per cent taking cue from lower margin (net margin reduced from 21 per cent to 18 per cent) due to higher-than-expected cost in 4Q14 as explained above,” it said.
Correspondingly, while maintaining its ‘outperform’ rating on the stock, Kenanga Research’s target price is reduced by 10 per cent from RM8.21 per share to RM7.48 per share based on 20fold FD current year 2015 (CY15) revised earnings per share (EPS).