Hartalega NGC plant 4 & 5 to boost earnings

February 7, 2018 | By | Reply More

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KUALA LUMPUR: Hartalega Holdings Bhd’s Next Generation Integrated Glove Manufacturing Complex (NGC) is expected to generate higher income, following the commissioning of its plant 4 in the first half this year.

Analyst said the capacity from plant 4 was fully sold out as with the rest of the NGC plants despite the expected increase in average selling prices (ASPs).

“We expect contribution coming from NGC to increase in the coming months. Hence, we revise our financial year ending March 31, 2018 (FY18) to FY19 earnings upwards by 9.8 per cent and 11.4 per cent, respectively.”

MIDF Research said the revision was based on its assumption on the expected utilisation rates to above 90 per cent and the ASPs for both financial years.

The research house said the risks to Hartalega earnings include fluctuation of US dollar and ringgit, lower than expected raw material prices and lower demand from customers.

MIDF has maintained its ‘neutral’ view on Hartalega with a revised target price of RM9.68 from RM7.30 per share post earnings revision.

“We believe Hartalega’s share price will retrace further in the coming three months to trade closer to its fundamentals.”

MIDF said Hartalega’s share price surged 51.6 per cent since its last earnings announcement back in November 2017, leaving limited room for future share price appreciation.

It said Hartalega’s plant 5 is currently under construction and is expected to start commissioning in second half this year.

“Currently, the NGC plants are contributing about 52 per cent of Hartalega’s total revenue with the balance contributed by plants in Bestari Jaya.”

Upon the complete commissioning of NGC (Plant 1-6), MIDF said the revenue contribution from NGC will increase more than 70 per cent, which in turn would boost the net margin of Hartalega.

“Therefore, we opine that post-complete commissioning of NGC, the net margins of Hartalega will be hovering above at 20 per cent.”

Hartalega’s net profit in third quarter (Q3) ended December 31, 2018 surged 70.65 per cent to RM113.02 million from RM66.23 million a year ago due to higher sales demand and improvement in production capacity, lower costs incurred and net foreign exchange gain.

Its revenue in Q3 increased 32.18 per cent to RM603.14 million from RM456.29 million in the same period a year ago, spurred by higher sales volume.

Hong Leong Investment Bank (HLIB) said gloves demand would remain robust throughout 2018 on the back of the environmental purge in China, affecting its vinyl glove producers.

“This phenomenon should continue to support the higher utilisation rates in 2018.”

It said Hartalega expects to launch its anti-microbial gloves in Europe by second quarter of 2018, while waiting for Food and Drug Administration (FDA) approval for the US market.

“We like Hartalega for its leadership position in the nitrile segment and strong fundamentals. However, we believe the stock reflects these fundamentals at current prices and the shadow of the demising ringgit catalyst could halt further impressive gains this year.”

HLIB also maintained its ‘hold’ call with a target price of RM10.70 per share.

Kenanga Research said the anticipation of higher demand triggered Hartalega to gradually commissioning its plant 4 (ten lines) and the remaining two production lines will be commissioned progressively.

“We expect contribution from plant 4 to drive Q4 18 and FY19 earnings growth. The plant 5 is also expected to boost additional capacity by 18 per cent to 33.6 billion pieces per annum.”

Kenanga has also maintained its FY18 and FY19 earnings forecasts, citing that Hartalega’s share price has run up by 100 per cent over the last 10 months.

“We believed all the positives have been priced in. Hence, we downgrade our call from market perform to underperform with a target price of RM10.00 per share.”

Its near-term headwinds include appreciation of ringgit against the US dollar, gas tariff hikes, and potential higher minimum wage could derail earnings.

At 11.45am today, Hartalega’s share rose 5.17 per cent to RM11.40 from yesterday’s closing price of RM10.84.

In its filing to Bursa Malaysia yesterday, Hartalega had proposed bonus issue of one-for-one, up to 1.7 billion new ordinary shares. The entitlement date will be announced soon.

It said the bonus issuance would encourage trading liquidity of its shares on Bursa Securities and allow greater participation by investors as well as potentially broadening the shareholder base of the company.

Hartalega said the proposed bonus issue is not expected to have any material effect on its earnings for FY18. However, it would dilute share price for more cheaper pricing.

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