Research company downgrades Hartalega
Affin Hwang: Challenging for glovemaker to deliver high growth rate
PETALING JAYA: Affin Hwang Capital Research has downgraded Hartalega Holdings Bhd from “hold” to “sell” as it would be challenging for the glovemaker to deliver a similar above 50% growth rate in financial year 2019 (FY19).
The research firm said the group is already running at full capacity and that margin expansion estimates would not be as significant as in FY18.
It added that since the fourth quarter of FY17 (4Q17), Hartalega’s plants have been operating at utilisation rates of more than 90%.
This was close to its maximum capacity and above its historical average of 85%-88%, the research firm noted in its report.
“We have revised up our utilisation rate forecast to 92%, as our channel checks suggest that demand is likely to remain robust due to the vinyl glove shortage.
“We forecast a strong earnings growth in FY18 of 53%, which partially takes into account stronger utilisation rates versus the average utilisation rate in FY17 of 87%.”
In its research note yesterday, Affin Hwang Research said that it was downgrading its call on Hartalega to a sell due to the stock’s demanding valuation.
Shares of Hartalega have risen 124% yearto-date. The stock rose four sen higher or 0.37% to RM10.82 yesterday.
Affin Hwang Research said a recent meeting with management indicated that the company is sticking to its annual capacity growth rate target of 15% to 20% in order to maintain the current supply gap.
This is expected to result in better margins in FY18 relative to FY17.
“For FY19, however, we expect a more modest margin expansion and growth rate versus the estimates of FY18, as the company would have benefited from the spike in demand starting research firm.
It has raised FY18-20 earnings per share forecasts by 2% to 10.2% to factor in the better growth prospects.
“As we also roll forward our valuation to FY20, we have raised our target price to from 2Q18,” said the RM9.30 on a slightly higher multiple of 26 times, from RM7.20 (which is 25 times calendar year 2018 estimated price-to-earnings ratio).”
The research firm said it preferred Top Glove Corp Bhd for exposure to the rising glove demand due to its cheaper valuations.