On the back of these results, the company has declared a second interim dividend of two sen per share for its financial year ending March 31, 2016 (FY16). The entitlement date is on March 10, 2016 and payable on March 30, 2016. The stock closed unchanged at RM4.98.
KUALA LUMPUR: Affin Hwang Capital Research is retaining its Hold call for nitrile glove maker Hartalega
with an unchanged target price of RM4.40.
It said on Wednesday although prevailing sentiments on the glove players are turning positive on easing of competition and current Ringgit weaknesses, “we remain cautious on Hartalega’s eroding valuation premium vis-à-vis peer on sustained profitability decline”.
Affin Hwang Research likes Hartalega for its operational excellence, but the high valuations amid shrinking margins could lead to near-term stock de-rating.
“Our unchanged 12 month target price of RM4.40 is pegged to 22 times CY17E EPS, which is one standard deviation below its three-year mean,” it said.
The research house said there were no surprises in Hartalega’s 2Q17 results as it registered sequential recovery on robust sales volume growth and bolstered by the weaker Ringgit.
Margin expanded on higher utilisation rates and efficiency gains, as unit costs fell on increased volume.
“Overall performance is commendable, although we remain cautious on sustained long-term profitability decline. Maintain Hold,” it said.
Affin Hwang Research said Hartalega’s 2Q revenue rose 9% sequentially to RM437mil, on the back of added capacity and higher volume sales growth.
Utilisation rate climbed to a high of 88%, in line with the stronger volume sales. Average selling prices also recovered slightly by +1.2% on-quarter, largely driven by the weaker Ringgit.
The pricing increase was, however, largely to compensate for the higher production costs driven by strengthening of raw material prices, implementation of minimum wage in July 16, and the hike in utilities tariffs.
“Having said that, the ability to raise prices and maintain strong utilisation rates is commendable, considering the prevailing capacity glut,” it said.
Hartalega booked in a core net profit of RM71mil (+27% on-quarter; +18% on-year) in 2Q, which was in line with its estimated range previewed earlier.
“Overall 1H17 earnings are in line with our expectations, making up 46% of our full year estimates.
“Looking forward, 2H17 should be sequentially stronger, underpinned by healthy utilisation level on higher volume sales growth amid progressive capacity expansion.
“Margin-wise, 2Q EBITDA margin rose two percentage points on-quarter to 23%, a decent recovery, although still markedly lower than its historical average of 31%.
“The decline in profitability was in part due to the intense competition within the nitrile segment, which drives down the profitability on pricing competition, although we are seeing signs of stabilisation at current levels for now,” said Affin Hwang Research.
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