HARTALEGA HOLDINGS BHD
By MIDF Research
Target price: RM6.99 (unchanged)
HARTALEGA’S earnings for the first quarter of financial year 2018 (FY18) came in at RM96.4mil, which is both within MIDF Research’s full-year expectations at 25.1%, as well as consensus’ at 24%.
Revenue increased by 14.1% quarter-on-quarter (q-o-q) and 49.6% year-on-year (y-o-y) while earnings increased by 7.8% q-o-q and 71.6% y-o-y.
The more stable condition of the US dollar versus ringgit, which traded at an average of RM4.31 per US dollar during the quarter, is a catalyst for these rises.
In the first quarter of FY18, sales volume for nitrile gloves increased by 12.3% q-o-q and surged by 40.6% y-o-y.
The rise in volume was mainly attributable to better demand, a higher utilisation rate of 91%, improvement in internal processes and increase in average selling prices (ASPs).
However, the rise in ASPs was undermined by higher raw material prices during the quarter, which averaged at about RM6.15 per kg for natural rubber. Therefore, the ASPs only increased by less than 1% q-o-q and 10.6% y-o-y.
As for natural rubber gloves, sales volume saw a contraction of 20.8% q-o-q and 27.3% y-o-y.
Post-completion of Hartalega’s Next-Generation Integrated Glove Manufacturing Complex’s Plant 3 back in June, it is understood that Plant 4 is well on track to start commissioning early this month.
The research house also observed that net margin has increased slightly at 16% in the first quarter of FY18 in comparison with 14% in the same period a year ago.
This is mainly due to better product pricing, increase in production capacity and improvement in glove production processes.
MIDF Research makes no changes to its earnings forecast as despite the more positive outlook for Hartalega in FY18, all positives had been priced in.
Additionally, Hartalega’s valuation remains lofty at 26.6 times FY17 price-to-earnings ratio when compared to an average of 19 times for its peers.
Therefore, the research house reiterated its “neutral” recommendation, with an unchanged target price of RM6.99 per share.
By AmInvestment Bank Research
Fair value: RM3.20
OLDTOWN, through its wholly-owned subsidiary Shenzhen Kopitiam Asia Pacific Ltd, has entered into a territorial licence agreement with Xiamen Kuaike Investment Management Co Ltd to operate in Shanghai.
This agreement is an extension to an earlier negotiated territorial licence agreement on March 30, 2017, extending the terms of the agreement to five years, with an option to renew two consecutive terms of five years.
In return for its franchise, OldTown is expected to receive royalty from generated sales and other various territorial fees.
The China licensed business model provides OldTown opportunities for growth without the downside risk and capital intensive investments. The financial risk is solely borne by the licensee.
Xiamen Kuaike should be well aware of OldTown’s past struggles in China. OldTown’s China store count peaked at four stores in 2013 before being scaled back to one store in the subsequent year.
As of March 2017, OldTown has two stores in China, representing less than 1% of the group’s total store count. Therefore, the research firm expects the licensee to be highly selective and strategic in the gradual rollout of stores.
AmInvestment Bank Research expects greater benefits to arise from the physical store presence and branding, creating advertising and promotional synergies for its e-commerce distribution channels to boost fast-moving consumer goods (FMCG) sales.
With the exception of the Guangdong province, Xiamen Kuaike has licence agreements to the territories that generate close to 80% of OldTown’s China FMCG sales.
Thus, the research house leaves its earnings estimate unchanged, maintaining its “buy” recommendation and fair value (FV) of RM3.20 per share.
The FV is based on 17 times calendar year 2018 forecast price-to-earnings ratio, which is a 20% discount to its FMCG peers of 21 times.
UNISEM (M) BHD
By CIMB Research
Add (no change)
Target price: RM5
UNISEM’S core net profit for the first half of 2017was in line with CIMB Research’s expectation at 46% of its full-year forecast, but ahead of consensus’ at 49%.
Core net profit for the period rose 6.1% year-on-year (y-o-y) as US dollar revenue grew to US$165.4mil on the back of 6% higher sales from its leaded and leadless and 8% higher sales from its wafer-level chip-scale packaging segments.
The revenue improvements were further amplified by the depreciation of the ringgit against US dollar.
In terms of end-segment, industrial and consumer posted strong revenue growth of 36% and 19% respectively, while lower sales by 11% were registered at communication and 3% at auto.
Overall, core net profit during the period rose by 26.7% y-o-y to RM90mil.
Unisem plans to add 19 flipchip machines by end of financial year 2017 (FY17), adding to the 54 added in FY16.
Unisem’s target is to raise its capital expenditure budget from 30% to 40%-45% of group earnings before interest, tax, depreciation and amortisation in FY17 for additional production capacity for wafer bumping.
The group is expecting sequential sales growth of 5% in the third quarter of 2017 in US dollar terms, driven by strong demand from communication and new businesses such as microelectromechanical systems microphone and solid-state drive power management.
With the appointment of a new management team and investment in equipment to increase automation, CIMB Research expects narrowing losses from Unisem’s Batam operations in FY17 versus the RM27mil net loss in FY16.
Looking forward, Unisem is looking to invest in a 12-inch wafer bumping line. This will provide better economies of scale for the group, according to CIMB Research, since it can also run the existing eight-inch wafer bumping production from the same line.
CIMB Research has maintained its “add” rating with an unchanged target price of RM5, still based on 15 times calendar-year 2018 price-to-earnings ratio, in line with the Malaysian semiconductor sector average.
LAFARGE MALAYSIA BHD
By Maybank Investment Bank Research
Target price: RM6.90
DESPITE the record-high infrastructure construction job awards in 2016, the demand for building materials in Malaysia was softer in the first half of 2017.
Maybank Investment Bank (IB) Research reckons the key reason was the still early stage of works for the Klang Valley Mass Rapid Transit 2 (KVMRT 2) and the slow work awards of Klang Valley Light Railway Transit 3 (KVLRT 3).
Assuming the construction works for KVMRT 2, KVLRT 3 and East Coast Rail Link progress together in 2018-2019, the research firm estimates that the demand for cement is around 1.5 million tonnes per annum, about 8% of total estimated cement demand of 18 million tonnes in 2017.
Maybank IB Research also believed that the demand for cement would be met locally as the local cement average selling price (ASP) is already among the lowest in the region.
Although the industry has raised the bag cement ASP by more than 20% since end-Jun 2017, the higher ASP has sustained for a month now, signalling the receptiveness from the market. Also, importing cement would be costly due to the expensive logistics costs.
Lafarge’s results for the second quarter of 2017 are scheduled to be released on Aug 29 and Maybank Ib Research expects the earnings to be weaker quarter-on-quarter (q-o-q) due to seasonally softer volume and lower ASPs.
However, it is expected that Lafarge will be profitable from the third quarter of 2017 onwards.
Causes include bag cement ASP hike lifting Lafarge’s revenue by around RM38mil per quarter as bag makes up around 30% of the company’s total volume, and substantial cost savings coming from transportation, maintenance, integration exercise, headcount cut and coal costs.
Thus, Maybank IB Research recommends to buy at a target price of RM6.90.