By Kenanga Research
Target price: RM4.72
HARTALEGA’S first quarter 2017 (Q1FY17) profit after tax and minority interest of RM56.2mil came in marginally below expectations at 20% of both Kenanga Research and consensus full-year net profit forecasts.
The negative variance from Kenanga Research’s forecast was due to lower than expected average selling prices (ASPs).
No dividend was proposed or declared for the current quarter under review.
Quarter-on-quarter, Q1FY17 revenue came in 0.3% higher due to lower sales volume in the nitrile glove segment of 2%, which accounted for 95% of sales but was mitigated by marginally higher ASPs in ringgit terms.
The lower utilisation rate at 81% compared to the average of 85% was probably due to the wait-and-see attitude of buyers on the back of higher supply and raw material price volatility.
However, volume has moved up to the low teens with utilisation hitting the 85% mark starting from July.
Due to some competitive pressure, operating margin decrease from 17.8% in 4Q16 to 17% in Q1FY17 due to price competition, increase in raw material prices, natural gas and mitigated by lower depreciation charges arising from changes in depreciation method with effect from April 1, 2016.
Year-on-year, Q1FY17 revenue rose 25% due to higher sales volume and flattish ASPs underpinned by new capacity from the New Generation Integrated Glove Manufacturing Complex (NGC) and weakening of the US dollar against ringgit.
Profit before tax margin was reduced from 24.9% to 17% due to competitive pressure leading to lower ASPs.
“Looking ahead, we understand that volume in the month of June and July have moved up to low teens with utilisation hitting the 85% mark.
“We are not perturbed by the temporary lower margins which are expected to be more than offset by new capacity expansion.
“Looking ahead, we expect earnings to jump upon the gradual ramp-up of the NGC,” said Kenanga Research.
Presently, NGC has commissioned all 24 lines of plant 1 and 2 combined.
These two plants will add about 8 billion pieces or 56% more new capacity and providing the much-needed boost to FY17 earnings.
KLCCP STAPLED GROUP
By MIDF Research
Target price: RM7.30
KLCCP Stapled Group first-half financial year 2016 (H1FY16) core net income of RM360.6mil was within expectations at 50% and 48% of MIDF Research and consensus’ full-year estimates.
Distribution per unit (DPU) of 8.6 sen was declared for Q2FY16, bringing total DPU to 17.2sen in H1FY16.
Core net income for H1FY16 was flattish, inched up by 0.6% year-on-year (y-o-y) to RM360.6mil.
Performance of retail division was subdued, having profit before tax of the division relatively unchanged at an increase of 0.2% y-o-y from the previous year.
Meanwhile, profit before tax (PBT) of office division was also flattish on-year on the back of long term lease agreement with tenants.
On the other hand, hotel division dipped into the red in Q2FY16 due to weak market conditions, dragging the hotel operations division to report a cumulative pre-tax loss of RM4.7mil in H1FY16.
The weakness in hotel operations division has also dragged KLCCP core net income in Q2FY16 by 2.7% lower on quarterly basis.
MIDF Research maintains its earnings forecasts for FY16 and FY17 given the in-line results.
Outlook for office division is expected to be stable due to its long-term lease agreement with tenants.
However, KLCCP cited that hotel operations may continue to suffer from lower occupancy rate which could be due to weak demand for luxury accommodation.
Similarly, KLCCP expects weak consumer demand to weigh on retail division.
“Our target price is based on dividend discount model (DDM) with required rate of return at 7.8%.
“We are keeping our neutral stance on KLCCP as outlook for KLCCP is neutral given mixed outlook for different divisions.
“Dividend yield of KLCCP is estimated at 4.6%,” said MIDF Research.
RHB BANK BHD
By UOB KayHian
Target price: RM5.35
RHB Bank had organised a short briefing to shed more light on its small and medium enterprises (SME) banking growth and future outlook.
This was vital as the market continues to perceive the group as being largely a corporate banking-focused franchise, wherein risk-adjusted returns are lower. On the contrary, the group has managed to raise its SME loan market share from 6.2% in 2013 to 8.9% in Q1FY16, ranked 4th in overall market share from 6th in 2013.
Moving forward, the group aims to raise its composition of SME loans from the current 16.9% of total loans base to 20% by 2020 and to be among the top three banks in terms of SME loan market share domestically.
Key strategies in place include faster turnaround approval time by refining its credit approval processes, more SME marketing resources allocated across all its branches, enhanced collection capabilities with dedicated field collectors across all its key regions, and increased cross-selling initiatives to tap the SME value chain across its existing business banking ecosystem.
The group is expected to make some form of impairment on its exposure to Swiber sukuk bonds of an estimated S$85mil (RM255mil) in its upcoming Q2FY16 results.
However, the recent move by Swiber’s management to take a judicial management route rather than liquidation does help to raise the probability to recover some from of residual value from its bond exposure.
“We believe RHB Bank’s management is likely to adopt a more conservative approach in its upcoming impairment assessment.
“In terms of its total oil and gas (O&G) loans and securities exposure in Singapore, the amount stands at a relatively manageable S$500mil (RM1.5bil), or 0.8% of the group’s loans and securities portfolio.
“If the above portfolio were to reflect a worst-case scenario gross impaired loan ratio of 70%, imputing a 70% loan life coverage (LLC) ratio, this would still equate to a manageable burn rate of 3% on its current book value,” said UOB KayHian.
Total O&G exposure stood at 2.7% of the group’s loan base.
RHB Bank’s management had also alluded that its core operating earnings trend excluding the surprise impairment on its Swiber bond exposure is on track to meet its return on equity (ROE) target of 10%. This is certainly a pleasant surprise given consensus relatively low 2016 ROE expectation of less than 9%.
The research house believes that the market continues to underestimate the structural cost savings momentum under way as implied by consensus’ 2% operating cost growth assumption as compared to Q1FY16’s -5% cost improvement post staff cost rationalisation.
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