Signs of slower sales growth for Hartalega

KUALA LUMPUR: Hartalega Holdings Bhd's current valuation is yet to price in any negatives in view of the slow take up rate of its new production lines and expectations of tepid sales volume growth in the near term.

Maybank Investment Bank Research noted that the glovemaker's sales order has been slightly slower since 2Q18, possibly due to the resumption of glove production in China.

It said Hartalega has also started installing production lines at its Plant 5 since August 2017, which raises capacity by 17% to 32.5 billion pieces by March 2018. This may result in present plant utilisation rate tapering slightly from a peak of 92% in 1QFY3/19.

Meanwhile, the installation of production lines at Plant 6 will also be deferred slightly by 2-3 months to May 2019, which will raise its capacity by 14% to 37.9b pcs by Dec 2019. 

"We maintain our for sales volume growth assumption of 21%/14%/6% in FY19-21."

On the flip side, the research house noted that the group will not incure depreciation charges as long as the new lines are installed even but not commissioned while NBR cost pressure will be offset by US dollar strength against the ringgit.

It said nitrile glove average selling price has also been revised upwards marginally by 2-3% in 2QFY19 to reflect the changes in cost.

For 2QFY19, Maybank expects Hartalega's core earnings to be flattish quarter-on-quarter.

It maintained its earnings forecasts, sell call and target price of RM5.55 on the counter.