Highlights

HARTALEGA HOLDINGS BERHAD - Gradual Recovery

Date: 06/11/2019

Source  :  PUBLIC BANK
Stock  :  HARTA       Price Target  :  5.20      |      Price Call  :  HOLD
        Last Price  :  16.38      |      Upside/Downside  :  -11.18 (68.25%)
 


Hartalega reported a net profit of RM197.9m for 1HFY20. The results came in within our but missed consensus estimates at 45% and 41% respectively. The better earnings performance QoQ was within our expectations as the operating environment for the glove makers has been improving and the previous oversupply concern has subsided. The uptick in demand due to the US China trade war has led to better sales volume growth for Hartalega. However, Hartalega will not be able to fully capture the benefits of higher demand in FY20F due to the late commissioning of Plant 6. As such, we maintain our Neutral call, with an unchanged TP of RM5.20. On a side note, Hartalega declared an interim dividend of 1.8sen per share.

  • Sequential improvement in 2QFY20. Hartalega’s 2QFY20 revenue grew by 10.8% QoQ, on the back of higher sales volume (+12.7% QoQ), despite ASP falling by 2.7% QoQ. We reckon the stronger sales were partly due to trade diversion, as the Chinese glove makers divert their orders to other countries, in order to dodge the additional 15% tariff imposed by US on Chinese-made medical gloves that came into effect on 1st September. Average utilization rate has improved to 85%, as opposed to 76% in 1QFY20. Note that the lines in NGC are running well above 90% utilization rate. Net profit also grew by 10.4% QoQ to RM103.9m. PAT margins, however, eased marginally by 10bps, to 14.6% (1QFY20: 14.7%), despite the lower upkeep cost and labour cost as we believe part of the cost savings were offset by higher natural gas cost. Recall that natural gas prices were revised upwards abruptly by an average of 5.3% in July and glove makers were unable to adjust their ASPs immediately given the short notice. On top of that, the fact that the orders were locked in c.3 months before the delivery of goods also contributed negatively to the margins. The effective tax rate has also increased on a QoQ basis to 24.1% (1QFY20: 22.5%) due to higher current and deferred tax expenses.
  • Expansion updates. With a capacity of 100 lines, Hartalega’s current capacity stands at 36.6bn pcs pa. Plant 6’s (+4.7bn pcs pa) construction is underway and the first line is targeted to commission by 1QCY20. As for Plant 7 (+3.4bn pcs pa), construction works has commenced, with its 1st line targeted to be commissioned by 2HCY20. Upon full commission of Plant 6 and 7, Hartalega’s annual production capacity should reach 44.7bn pcs by FY22F

Source: PublicInvest Research - 6 Nov 2019

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