Stock Name: HARTA
Company Name: HARTALEGA HOLDINGS BHD
Research House: RHB

Hartalega Holdings Bhd
(Sept 6, RM5.03)
Maintain outperform at RM5.02 with fair value of RM6.19: We met with Hartalega's management recently and continue to like the company for its niche position as the largest nitrile glove producer in Malaysia as well as its technological capabilities that are well ahead of its competitors.

The company is actively looking for new land for expansion beyond FY2013. Currently, it is in negotiations to purchase a plot of land adjacent to its existing location as it wants to streamline operations in one location to minimise cost, which would also help boost margins.

Currently, the expansion of Plant 5 is ongoing. To recap, four lines in Plant 5 were commissioned in 1HCY2010, while the remaining six lines (+0.9 billion pieces) are expected to be commissioned and installed by end-CY2010.

Hartalega also plans to decommission all 10 of its lines in Plant 1 in October, replacing them with six new high-capacity lines. These new high-capacity lines are expected to be progressively installed and commissioned from July 2011 to February 2012.

Hartalega is currently operating at an average utilisation rate of approximately 80%, and while this appears low management explained that it is due to the product mix. With nitrile gloves accounting for 85% of sales, average utilisation rates tend to be lower compared with a manufacturer that predominantly manufactures natural rubber gloves.

However, this has been to Hartalega's advantage as it was not really affected by the surge in latex prices. As such, prices for nitrile gloves are currently lower than latex gloves and the company is experiencing a switch in customer ordering patterns.

Moving forward, Hartalega's growth strategy would include growing organically by building new production capacity, leveraging on its technical know-how, expanding its nitrile glove exports to more developed nations and developing human capital as well as improving its processes to enhance its competitiveness against its peers.

Following the one-for-two bonus issue, Hartalega's share base will increase to 363.5 million from 242.2 million shares. Management intends to maintain a 20 sen net dividend per share (DPS) despite the larger share base given its strong cash balance.

Risks include a surge in raw material prices which may result in margin squeeze, an appreciating ringgit against the US dollar and execution risk from capacity expansion. ' RHB Research, Sept 6


This article appeared in The Edge Financial Daily, September 7 2010.