Hartalega’s lower net profit indicates health of industry

  • Corporate News
  • Thursday, 07 Nov 2019

Market factor: Analysts say the company’s performance can be a bellwether of the overall health of the stocks in the industry given its sizeable market share.

PETALING JAYA: Rubber gloves stocks fell after taking a cue from Hartalega Holdings Bhd which announced its financial results for its second quarter ended Sept 30, on Tuesday.

The biggest capitalised rubber glove maker on Bursa Malaysia and the market leader for nitrile gloves had reported a 13.6% lower net profit year-on-year (y-o-y) to RM103.87mil in its second quarter.

In its filing with the stock exchange, the company attributed its earnings decline to lower average selling prices and higher packaging and natural gas costs.

Analysts said the company’s performance can be a bellwether of the overall health of the stocks in the industry given its sizeable market share.

Hartalega fell by five sen to RM5.42 in yesterday’s trade session.

“This time around the factors that have affected Hartalega’s performance in the company’s second quarter seem to be factors that can potentially affect the other companies in the industry as well.

“That’s why the decline in the other rubber glove stocks, ” a local analyst said.

Top Glove Corp Bhd declined 13 sen to RM4.37, Kossan Rubber Industries Bhd dropped five sen to RM4.20 and Supermax Corp Bhd fell two sen to RM1.47.

Commenting on Hartalega’s financial results, MIDF Research said sales volume for Hartalega actually grew by 8.2% y-o-y to 7.5 billion pieces.

“The higher sales volume was mitigated by the decline in average selling prices (ASP) by 8.2% y-o-y to about RM95 per one thousand pieces. The contraction in ASP was caused by the downward pricing pressure from the aggressive expansion of nitrile glove manufacturing capacity by fellow competitors, ” MIDF said.

“Consequently, Hartalega’s earnings declined as the higher costs of labour, packaging and natural gas costs were unable to be fully passed on to customers in order to protect market share, ” the research house added.

MIDF Research which maintained its “neutral” rating on Hartalega with an increased target price of RM4.90 (from RM4.77) said it continued to be concerned about the ASP contractions from the intensifying competition in the nitrile glove segment.

“The recent restoration of the supply-demand dynamic came at cost of lower ASP despite the picked-up demand. In the near term, we believe that higher sales volume resulting from capacity expansions coupled with the cost optimisation efforts will sustain earnings growth, ” it said.

UOB Kay Hian Research, meanwhile, said it was disappointed with Hartalega’s second quarter results.

“Utilisation rates did not firm up as expected while ASPs displayed softness. Slight delays in capacity addition affirms a slight lingering in the demand-supply imbalance. Incoming latex supply could spill over to the nitrile glove space, ” it said.

The research house also said Hartalega’s valuations have run well ahead of sector fundamentals and had downgraded the stock to “sell” with a lower target price of RM4.20 from RM4.60.

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