UOB Kay Hian Research sees lower FY15 earnings for Hartalega

KUALA LUMPUR: UOB Kay Hian Malaysia Research is maintaining its Sell call on glove maker Hartalega as it expects the net profit for the full year ended March 31, 2015 (FY15) to be lower.

Placing a target price of RM6.09, the research house had on Wednesday said Hartalega was affected by persistent selling price pressure, next generation integrated glove manufacturing complex (NGC) related  start-up expenses of RM20mil to RM25mil and minimal production volume in FY15.

“We project full-year revenue growth to be flattish on-year due the lack of production volume growth throughout the most of FY15 (the maiden production lines of the NGC were only commissioned in 4QFY15). 

“Meanwhile, the positive impact of the firmer FY15 average exchange rate of RM3.35/US$ (vs RM3.20/US$ last year) would, in our view, be largely offset by weakening pricing power for nitrile gloves,” it said.

Hartalega is expected to announce the results on May 5. 

 

UOB Kay Hian Research said due to the 8%-9% on-year decline in Hartalega’s average selling prices (ASPs), it projects a softer FY15 EBIT margin of 24% (FY14: 28%) and a 5% to 8% on-year decline in FY15 core net profit.

“We expect sequential sales volume growth of about 5%-6% in 4QFY15 thanks to maiden contribution from five to six new NGC lines that have been coming on-stream progressively since January 2015. This coupled with the firmer 4QFY15 exchange rate of RM3.61/US$ (vs RM3.37/US$ in 3QFY15) suggests that top-line is likely to have grown 7%-10% on-quarter,” it said. 

The research house pointed out downward pressure on selling prices, due to intensifying competition within the industry, persisted in 4QFY15. This saw Hartalega further lowering its nitrile glove ASPs by 2%-3% on-quarter to about US$26 to US$27 per 1,000 pieces (from an average of US$28/1,000 pieces in 3QFY15).

However, for 4QFY15, it said the margins would have likely expanded on-quarter on the back of the firmer exchange rate and further easing of nitrile raw material prices (-7% on-quarter).

UOB Kay Hian Research expected the group to register a sequential improvement in 4QFY15 net profit of RM53mil to RM55mil (3QFY15: RM49.5mil). 

“However, we project a on-year softer FY15 core net profit of RM210mil-RM220mil due to the persistent selling pricing pressure, NGC-related startup expenses of approximately RM20mil to RM25mil and slower production volume growth in FY15. 

“Separately, we note that FY15 forex losses could widen further in the coming quarter (from RM5.1mil for 9MFY15) as the group recognises realised and unrealised forex losses on its hedging transactions,” it said.