Analysts Bullish On Hartalega Prospects
Posted Date : 18 Aug 09
GLOVE manufacturer HARTALEGA HOLDINGS BHD posted sterling results for its first financial quarter (1Q) ended June 2009. The company made RM26.4 million in net profit on the back of RM125.3 million revenue for the three months in review.
Compared to the corresponding period a year ago, Hartalega’s net profits soared by almost 105% while sales jumped 42.7%.
Hartalega attributed the better showing to the group’s continuous expansion in production capacity, higher nitrile sales mix, and improvement in production process, lower synthetic and natural latex price and the favourable exchange rate.
In a report yesterday, CIMB Research said that Hartalega’s annualised 1Q net profit came in at 108% of its projection and 107% of consensus. This growth was largely stoked by Hartalega’s continuous capacity expansion from four billion pieces per annum in 1Q09 to 6.2 billion pieces in 1Q10. Hartalega’s capacity currently stands at 6.2 billion pieces per annum.
According to CIMB, Hartalega planned to decommission 10 lines at Plant 1 and replace them with six high-capacity lines targeted for the emerging markets.
“This will take its annual capacity to 6.5 billion pieces by the end of FY2010. Longer term, it intends to expand it to 10.5 billion pieces through a fifth plant that is under CONSTRUCTION and is slated for completion in FY2012,” CIMB says.
Hartalega will finance its expansion mostly with cash as it has RM29.7 million net cash currently, and could take on RM10 million to RM20 million in borrowings.
“Judging from the potential higher demand and improving earnings ability from its upcoming expansion plans, our earnings numbers look overly conservative.
“We are raising our FY2010-FY2011 utilisation rates from 74% to 75%, similar to our FY2012 assumption of 75% utilisation. We are also adjusting our cost assumptions in view of this quarter’s lower-than-expected costs. All in all, we are raising our FY2010-2012 earnings by 4%-10%,” CIMB said.
CIMB’s earnings upgrade pushed its end-CY2009 target price for Hartalega to RM7.32 from RM6.93, still pegged to a 10% discount to Top Glove Corp Bhd, which is, in turn, pegged to a target market P/E (price earnings) of 15 times. CIMB has an outperform call on Hartelega’s stock.
“We believe that the company is in a great position to tap on the increasing preference for nitrile gloves and the global rise of glove usage. Demand is also expected to be resilient, especially in countries that demand quality, such as the US, Germany and Japan,” CIMB said.
Maybank Investment Bank (Maybank IN), meanwhile, said that it expected short-term margin pressure from the current uptrend in latex prices, as there will be a lag in passing on higher cost to customers.
Also, Maybank IB added that Plant 5, which will add three billion gloves per annum to capacity, is delayed by three to four months, and will start contributing only in FY2011-2012, affecting FY2010 tax rate. Every 1% change in tax rate affects EPS (earnings per share) by 1.7%, Maybank IB noted.
“Minor near-term hiccups aside, we are still positive on Hartalega’s long-term earnings growth potential. We expect 23% three-year earnings compound annual growth rate (CAGR). Valuations are attractive with low PERs and PEG (price earnings to growth) ratios. Yet, the stock offers higher ROAs (returns on asset) and ROEs (returns on equity) than its peers,” it said.
Maybank has a buy call on Hartalega’s shares with an unchanged target price of RM6.50.
Hartalega closed at RM5.10 yesterday, down 10 sen.
This article appeared in The Edge Financial Daily, August 18, 2009.