Hartalega Holdings Berhad - Lofty valuations limit capital upside

Date: 08/08/2018

Source  :  MIDF
Stock  :  HARTA       Price Target  :  5.49      |      Price Call  :  HOLD
        Last Price  :  5.20      |      Upside/Downside  :  +0.29 (5.58%)


  • 1QFY19 earnings within expectations
  • Earnings boosted by increase in sales volume
  • NGC capacity expansion well on track
  • FY19F earnings forecasts maintained
  • Maintain NEUTRAL (negative bias) with a TP of RM5.49

Within expectations. Hartalega’s 1QFY19 earnings came in at RM124.9m which is in line with our and consensus expectations, representing 24.3% and 25.0% of full-year earnings forecasts respectively. On a quarterly sequential basis, revenue and earnings grew marginally by +14.5% and +7.0% whilst yoy, revenue and earnings increased by +17.5% and +29.7% respectively. No dividend was declared for the quarter under review.

Earnings boosted by higher sales volume. In 1QFY19, sales volume for both nitrile and rubber gloves increased by +19.6%yoy and +34.4%yoy respectively while on a quarterly sequential basis, sales volume increased by +5.0%qoq and +47.3%qoq respectively for both type of gloves. This helped in reducing the impact from the +23% increase in natural gas tariff earlier this year. The improved sales volume during the quarter was mainly attributable to: (i) better demand; (ii) increase in average selling prices (ASPs); (iii) higher utilisation rate of above 90% and; (iv) improvement in internal processes.

NGC capacity expansion well on track. Management disclosed that the newly completed Plant 5 will start commissioning two new lines every month beginning August 2018. Additionally, Hartalega has also started constructing its Plant 6 in June 2018 and it is expecting Plant 6 to start commissioning in 1HCY19. Furthermore, we understand from the management that the company will also be constructing Plant 7 which will be focusing more on specialty gloves and small orders. Hartalega targets to commission the first line of Plant 7 in 2HCY19.

Earnings forecasts. We are maintaining our FY19F earnings estimates at this juncture as we opine that Hartalega is on track to meet our earnings projection. The key risks to our earnings are the: (i) fluctuation of USD vs MYR; (ii) lower than expected raw material prices; and (iii) lower demand from customers.

Recommendation. Post earnings announcement, we are maintaining our Neutral (negative bias) recommendation on Hartalega with an unchanged TP of RM5.49 per share. We have previously included the capacity expansion timeline into our financial estimates and we opine that all positives have been prices in at this juncture. Our TP is derived via pegging our FY20F EPS of 19.6sen pegged to an unchanged PER19 of 28x, which is its five-year average PER.

Source: MIDF Research - 8 Aug 2018

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