KUALA LUMPUR: RHB research expects Hartalega
Bhd's earnings to improve in FY20 on the back of good demand for nitrile gloves and a stronger US dollar.
The research house maintained its buy call on the glove maker, which is its top pick in the sector, with an increased target price of RM6.05 from RM5.77 previously.
"Looking ahead, we expect FY20F earnings to improve, as we believe glove makers have started to self-regulate their expansion to ensure demand-supply equilibrium – beneficial for suppliers and consumers alike.
"A stronger USD is also beneficial to Hartalega’s earnings, as almost all of its sales are USD-denominated. This should mean higher MYR revenue," said RHB.
It added that the benefit is limited as 60% of Hartalega's raw material costs and debts are USD-denominated.
In terms of valuations, RHB says Hartalega is looking attractive as its share price has declined 28% from its peak of RM7.20 on Aug 28, 2018.
"Its forward P/E has declined 12x (or 1.5SD) to 32x forward P/E (or +0.3SD) currently.
"Recall that in the previous earnings down-cycle in 2016, its share price weakened ~30% from its peak, suggesting that the current share price downtrend has ended," it said.
Meanwhile, the expansion of its next generaion integrated glove manufacturing complex is on track.
RHB noted that the company commissioned all the targeted 12 lines for Plant 5 in May while construction for Plant 6 is underway with a target to commission the first line in 1H20.
Limited time offer:
Just RM5 per month.
