Demand intact for Hartalega’s products, but managing external fluctuations is key
KUCHING: Demand for rubber gloves remain robust, but analysts cautioned of the downside risks of rising nitrile butadiene rubber costs which could weigh on the upside of Hartalega Holdings Bhd’s (Hartalega) performance.
In a report, the research arm of TA Securities Holdings Bhd (TA Securities) noted that demand for rubber gloves of late has been vibrant.
“In our view, this would be supportive for newly installed capacity at the more efficient Next Generation Integrated Glove Manufacturing Complex (NGC) and in turn, buoy the rich margins that the group has commanded over the sector for the most part.
“Also, positively, the competitive pressures endured since early 2016 now appears to be dissipating with further upward adjustments (single-digit percentage) to selling prices to pass through rising input costs, particularly nitrile butadiene rubber, set to take effect in the fourth quarter of the financial year 2017 (4QFY17),” it said.
However, it pointed out that right now, managing fluctuations in the US dollar to ringgit and nitrile butadiene rubber is of upmost importance as volatility in these components is disruptive to profitability.
It added, the climbing cost of nitrile butadiene rubber could weigh on the upside from the strengthening of the US dollar against the ringgit.
Meanwhile, on Hartalega’s upcoming 3QFY17 results, TA Securities remained cautious of the company’s performance due to the rising cost of raw material.
“For Hartalega’s upcoming 3QFY17 results release, our concerns are on downside from the climbing cost of nitrile butadiene rubber (an increase of 19.2 per cent quarter-on-quarter) weighing on upside from the strengthening of the US dollar against the ringgit (an increase of 8.4 per cent q-o-q).
“While it is not straight forward to deduce the collective impact, for every one per cent change in the US dollar to ringgit and nitrile butadiene rubber respectively, we deduce a 3.6 and 1.8 per cent impact to earnings.
“As for sales volume, we only expect marginal q-o-q growth with almost optimal overall plant utilisation rates of 88 per cent observed in 2QFY17 and minimal capacity increment expected from Plant 3 of the NGC which recently commenced operations in October 2016.
“We estimate that the incremental capacity from Plant 3 translates into a 3.6 per cent q-o-q growth in the group’s overall installed capacity to 22.6 billion gloves per annum,” it projected.
Overall, the research team estimated 3QFY17’s core earnings to come within the range of RM70 million to RM80 million versus RM75.1 million in 2QFY17.