The lower profits were mainly due to the sharp strengthening of the ringgit in a short timeframe.
KUALA LUMPUR: Hartalega Holdings Bhd
’s net profit for the nine months ended Dec 31, 2018 of RM365mil came in below expectations, making up only 71% of CIMB Equities Research and 72% of Bloomberg consensus’ FY19 estimates.
The research house said on Wednesday the nitrile glove maker’s net profit rose only 13.5% on-year to RM365mil.
The lower-than-expected growth was due to the sluggish third quarter results from lower-than-anticipated sales volume growth leading to a shortfall versus CIMB Research’s revenue forecast, higher tax rates, and a spike in operating costs.
On a quarter-on-quarter basis, third quarter revenue rose only 1.3% as higher glove sales (+4.6% on-quarter) were offset by lower average selling price (ASP, -6% on-quarter).
The decline in ASP was to reflect the 10% on-quarter decline in raw material prices, which led toQ3 EBITDA margin rising 1.1% pts on-quarter to 23.7%.
However, Q3 core net profit was flattish at RM120.3mil as a result of higher tax rates (+5% pts on-quarter).
“For 2019F, we are of the view that Hartalega will face short-term increased competition with the addition in sector capacity, especially in the nitrile glove space.
“Hartalega has taken measures to ease any overcapacity concerns by slowing down the commissioning of the remaining six new production lines at Plant 5 (4.7 billion pieces p.a.) of its Next Generation Glove Complex (NGC).
“Previously, it aimed to commercialise all remaining six lines by end-1Q19 but has pushed that back to end-2Q19. For Plant 6 (4.7 billion pieces p.a.), construction is underway; we now believe the installation of Plant 6's first production line will begin only at end-4Q19F vs. our earlier forecast of 3Q19F,” it said.
CIMB Research said to reflect a slower ramp-up of its new production capacity, it lowered its FY19-21F EPS by 2.5-5.5%. Its target price was lowered to RM5.40, still based on 28.2 times CY19F P/E (in line with its five-year historical mean).
“Our Hold call remains. Despite expectations of short term competition in the nitrile glove space, we think Hartalega's robust long-term structural growth story remains intact.
“Although we think it is fairly valued at current levels, investors can look to accumulate the stock in the event of any potential sell-down due to concerns of a competitive environment,” the research house said.
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