CIMB Research retains Hold for Hartalega, switch to Top Glove

KUALA LUMPUR:  CIMB Equities Research is maintaining its Hold recommendation for glove maker Hartalega with an unchanged RM5.68 target price, still based on a 23 times CY17F price-to-earnings (P/E) which is a 10% premium to its historical mean. 

“Switch to Top Glove for stronger earnings growth in the sector,” it said.     

Hartalega’s 9MFY3/16 core net profit was in line with its expectations at 72% of the research house’s full-year estimate, and ahead of consensus at 78%. 

The 9MFY16 core net profit rose 35.4% on-year due to higher sales volume following the ongoing expansion at the Next Generation Integrated Glove Manufacturing Complex (NGC) and strengthening US dollar versus the ringgit. 

“We expect another strong earnings performance in 4QFY16, driven by higher shipment volume from higher utilisation and full commissioning of NGC plants 1 and 2,” it said.  

CIMB Research said the 3QFY16 revenue rose by 39% on-year from RM286.4mil to RM398mil on the back of higher shipment volume of nitrile gloves (up 37.5%) and favourable forex following the strengthening of the US$ against RM (up 27%). 

Utilisation was lower at 81% (versus 88% in 3QFY15) as the company was still in the midst of installing new production lines at its NGC. 

Hartalega’s 9MFY16 net proft surged 35% on-year while  revenue jumped 30.6% on-year, driven by higher shipment volume due to contributions from new production lines at the NGC as well as the strengthening US$ vs RM (up 23%). 

Total glove shipment volume expanded 23.4% on-year to 11.3 billion units, driven by robust demand for nitrile gloves which rose 28.6%. 

Commenting on the 9MFY16 core net profit, CIMB Research said it rose by 35% to RM217.2mil. 

It noted revenue from North America and Europe expanded by 31.4% and 37.1%, respectively, in 9MFY16. 

“These two markets continue to be the key growth drivers for the group given the higher acceptance and adoption of nitrile gloves in these markets. 

“Management is planning to increase the company’s sales exposure in Europe as it sees a bigger market potential there and expects contribution from the European market to increase from 35% to about 45%, similar to that of North America.  

“Management expects the NGC plants 1&2 to be fully commissioned and commercialise a total of 24 lines by February 2016. We estimate that 18 lines in the NGC have been commissioned as at 9MFY16. In addition, Hartalega is also in the midst of constructing NGC plants 3 & 4 which are due for completion in 2016, bringing with them another 4 billion capacity per annum,” it said.