CIMB Research cuts Hartalega earnings on expansion delays

KUALA LUMPUR: CIMB Equities Research is cutting glove maker Hartalega 's earnings per share (EPS) for FY20-21 for due to the delays in its Plant 7 project to produce specialty gloves.

It said on Friday it had cut the EPS by 4%-5% but raised its 12 month target price to RM6.78 as it rolled over its valuation to end-CY19.

“Our Hold call is unchanged. A re-rating catalyst for the stock would be higher-than-expected demand for rubber gloves and sharp weakening of ringgit against US$. Upside/downside risks: weaker-/stronger-than-expected nitrile raw material prices,” it said.

On Thursday, Hartalega announced that it had posted a 2QFY3/18 core net profit of RM120.2mil (7.2% on-year), bringing 1HFY19 core net profit to RM245.1mil. 

This was in-line and made up 47% of CIMB Research's full-year forecast and 48% of the consensus number. 

The 17.5% on-year growth in 1HFY19 core net profit was due to: i) higher revenue from an increase in sales volume (15.1% on-year) and higher selling prices (4.1% on-year), and ii) lower tax rates (-2.1% pts on-year). This was despite 1HFY19 EBITDA margins waning 1% pt on-year to 24% from higher nitrile prices (15.2% on-year.

CIMB Research said on a quarter-on-quarter basis, 2QFY19 revenue grew 1% from higher selling prices (4.8% on-quarter). This was despite a decline in sales volume (-3.8% on-quarter) owing to normalising demand for Malaysian gloves. 

“This is in tandem with the resumption of vinyl glove production in China beginning in 2H18. As a result, 2QFY19 EBITDA margins declined 0.7% pt on-quarter, while net profit waned 3.7% on-quarter, further aggravated by a spike in nitrile raw material prices (5.2% on-quarter). Nitrile prices have since tapered off in Oct 2018 (-2% on-quarter)

The commissioning of new lines in Plant 5 (4.7 billion pieces per annum) commenced in August 2018, with all 12 lines slated to be ready for commercial production by end-1Q19 (4QFY19). This will increase Hartalega’s capacity by 14.5% to 37.2 billion pieces per annum. 

Also, construction  on Plant 6 (4.7 billion pieces per annum) is under way, with the installation of its first line (of a total of 12 lines) slated for 2H19 (2QFY20). 

“This is a four-month deferral from our earlier estimate that initial commercial production would begin by 2Q19 (1QFY20).

“Also, Hartalega has yet to begin construction on Plant 7 to produce specialty gloves. The delay has been due to changes made to the plant’s design, which is expected to be finalised soon. 

“Commencement of production for Plant 7’s first line is now slated for end-2H19 (2QFY19), later than our earlier projection of 3Q18 (3QFY18). Note that once fully operational, the three new plants will raise total capacity by 27% (+12.1 billion) to 44.6 billion,” it said.

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