Record earnings seen for Hartalega in FY21


  • Corporate News
  • Wednesday, 20 May 2020

With rubber glove demand outstripping supply at least over the medium term, analysts expect buyers to more aggressively secure allocations – a scenario that’s likely to push up average selling prices of rubber gloves.

PETALING JAYA: Hartalega Holdings Bhd can look forward to record earnings for the financial year ending March 31,2021 (FY21) on the back of a surge in demand for rubber gloves due to Covid-19.

With rubber glove demand outstripping supply at least over the medium term, analysts expect buyers to more aggressively secure allocations – a scenario that’s likely to push up average selling prices of rubber gloves.

TA Research said it expects Hartalega to revise the average selling prices (ASPs) of its products gradually higher in FY21.

Based on this, it is raising its FY21 forecast earnings by 19.2% to RM640.8mil after revising its ASP assumptions higher by 7% to US$24.5/1000 piece for FY21.

As for plant utilisation rates, it expects this to remain at above 90% in FY21 as compared to 88% in FY20.

On Monday, Hartalega reported a net profit of RM115.7mil for its fourth quarter of financial year 2020 (FY20), bringing FY20’s net profit to RM434.8mil.

The quarterly net profit decreased 4.5% quarter-on-quarter (q-o-q) but increased 26.6% year-on-year (y-o-y). Meanwhile, the quarterly revenue stood at RM777.9mil, which is 2.3% lower q-o-q, but up 13.7% y-o-y.

Maybank IB Research noted that Hartalega’s ASP hikes have lagged that of its peers due to its customer profile and high customer concentration where its top-five customers account for around 50% of its sales.

“Given the sector-wide ASP hikes, we think the company may raise its ASPs, but at a more moderate pace (circa +5% q-o-q for the next two quarters). Its sales lead time of two months is shorter than its peers, but we note that this is the company’s usual practice, ” the research unit said in a report in which it raised the company’s FY21-FY22 estimated earnings per share by 48% and 18%, respectively.

Based on its sensitivity analysis, every 1% increase in the ASP would lead to a 5% increase in its FY21 estimated net profit, according to the research firm.

However, it believes the company’s share performance has largely priced-in the prospect of the ASP hikes.

For FY22, Maybank IB sees the group’s ASP dropping 5% because it thinks ASPs may normalise to the pre-pandemic levels in FY20.

A reason high ASPs are seen to be unsustainable is because Thailand and China, which are the second and third-largest exporters in the world, have resumed glove production after the easing of Covid-19 in both countries.

JF Apex Securities noted that Thailand’s leading glove player, Sri Trang Gloves, plans to ramp up its annual production capacity significantly to 32 billion pieces by the end of 2020 from 27 billion pieces.

“Moreover, we deem the United States will exempt tariffs for personal protective equipment (PPE) exports from China responding to Covid-19.

“Therefore, the resumption of glove supplies in the coming months will offset the recent ASP spike due to supply shortages, ” it said in a report yesterday.

JF Apex Securities has a hold call on the stock with a higher target price of RM9.10 from RM6.20 before, following a higher price to earnings (PE) applied.

“Our revised target price is now pegged at 53 times FY21 forward PE (from 42 times previously).

“Our valuation is in line with its +2SD above its five-year mean PE of 36 times, as we believe the group has greatly benefited from the current strong demand stemming from the pandemic. However, we opine that the current valuation of the stock looks pricey and has factored in all the positives.”

Shares in Hartalega, as well as that of its peers, fell yesterday on profit-taking following hopes of an early success for a vaccine against Covid-19 by US biotech firm Moderna.

Shares of Hartalega closed 12 sen lower to RM9.01 yesterday.

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