Hartalega may miss target 'hold', AirAsia 'buy'

Hartalega Holdings Bhd

By CIMB Research

Hold

Target price: RM8.23

HARTALEGA Holdings Bhd is unlikely to achieve its previous earnings forecast due to delay in commencement of its new production lines, competitive environment, higher capital expenditure (capex) and borrowings to fund its expansion plan, said CIMB Research.

The research house expects the average selling price to drop by 2 to 3% more, while Hartalega’s financial year 2016 (FY16) and FY17 net profit margins to come in between 18% and 20%, which concurs with its view that margin pressure was inevitable given its premium pricing.

“Hartalega’s expansion into natural rubber gloves segment and emerging countries will also weigh on its margins.

Fortunately, Hartalega has huge room to sustain its margin despite pressure given its superior margin as compared with its peers,” CIMB said, adding that the stronger US dollars against the ringgit would help buffer the impact of pricing pressure.

However, it said Hartalega would incur higher capex of about RM300mil to RM400mil a year in the next two years, which would draw down its loan facility up to US$100mil (RM362.89) in the next three years.

CIMB advised investors to stay on the sidelines and downgraded the stock to “hold”.

AIRASIA BHD

By Hong Leong Investment Bank

Buy (Maintained)

Target price: RM3.30

HONG Leong Investment Bank (HLIB) said Thai AirAsia’s (TAA) growth plans would be affected by the ban imposed on Thai registered airlines.

Details of the ban (due to poor safety records) include airlines from Thailand cannot increase frequencies to existing routes or add new routes to Japan, China and South Korea

HLIB said given the recovery of tourism industry, TAA had planned for the delivery of five more A320s (existing 40 A320s fleet) this year, to be deployed on hot routes in China, Japan and South Korea.

“We do not expect the ban to prolong, given the significance of the tourism industry in Thailand. Also, the Thai government has pledged to ensure agreements with the three countries will be met to satisfy its stakeholders,” HLIB said.

It is also not concerned about the utilisation of the additional A320s, given that TAA should still be able to redeploy fleet to other profit-making routes or redeploy the fleets to other associates within the AirAsia group to better utilise the fleets.

HLIB maintains its “buy” call on the stock based on the low-cost carrier’s largest network and strong brand name in Asia, low jet fuel price, increasing ancillary income and routes rationalisation of its competitor Malaysia Airlines.