Hartalega to see higher net profits in FY18, FY19

KUCHI NG: Har t a lega Holdings Bhd’s ( Hartalega) growth prospects have been viewed positively by analysts as the group is expected to record higher net profits for the financial year 2018 ( FY18) and FY19, driven by increased demand and production at its new plant.

Fol lowing a visit to the company, the research arm of Kenanga Investment Bank Bhd ( Kenanga Research) was more optimistic about Hartalega’s growth prospects and outlook in subsequent quarterly earnings.

“Our conviction is reinforced by the completion of Plant 3, which drove double- digit volumes in the fourth quarter of 2017 (4Q17).”

It expected higher FY18 and FY19 net profits on the back of completion of Plant 3 and higher utilisation underpinned by stronger- thanexpected demand.

“We believe the stronger growth prospect wi l l lend support to Hartalega’s high teens price earnings ratio ( PER) rating as the stock is head and shoulders ahead of peers in terms of margins, efficiency and profitability,” the research team opined.

Due to the sol id volume growth in 4Q17 and Hartalega’s persistent effort in expanding into other countries, Kenanga Research expect utilisation rate for Plant 3 at 88 per cent, which is in line with its historical average.

Of note, Hartalega’s 4Q17 profit after tax, armortisation, and minor it y int er es t ( PATAMI) came in at

RM89 million underpinned by higher sales volume as a result of full utilisation in Plant 1 and 2 as wel l as gradual commercialisation of Plant 3.

The research team also noted that Hartalega’s margins improved due to the reduction of operation overhead and improvement in operational ef f iciency whi le its 4Q17 earnings before interest, tax, depreciation and amortisation ( EBITDA) margin improved 5.2 percentage points to 26.2 per cent from 21 per cent in 3Q17.

Going forward, Kenanga Research believed that there would be a sol id industry demand and longer delivery lead times which would contribute to Hartalega’s growth.

It explained, “Solid industry numbers and longer delivery lead times are indicating that demand will outstrip supply at least over the medium term.

“Case in point is 1Q17 when the total exports of rubber gloves, synthet ic rubber (SR) and latex- based natural rubber ( NR) combined rose an estimated 10 per cent year- onyear ( y- o-y).

“Furthermore, Hartalega has managed to penetrate into new markets of which they are currently in more than 50 countries compared to more than 30 in the past which further reinforced solid demand.

“We understand that the robust demand for nitrile has led to longer delivery lead times.”

Due to the pent-up demand for rubber gloves, NGCs Plant 1 and 2 are presently fully utilised.

“Cor r e spond ing ly, we expect new capacity from the gradual ramp up in Plant 3 to boost earnings in subsequent quarters.

“We expect volume sales to surge following the lower average input latex cost in tandem with fal ling raw material latex price,” it said, noting that presently, NGC has commissioned all 24 lines of Plant 1 and 2 combined. Plant 3 would add circa four billion pieces (an increase of 18 per cent) new capacity and provide the much-needed boost to FY18 earnings.

“In anticipation of higher demand, we expect Hartalega to start building Plant 4 with an estimated capacity of four bi l l ion pieces per annum expected to be ready in early 2018,” the research team said.

All in, Kenanga Research raised its FY18 and FY19 estimated net profit by 18and 14 per cent respectively, to take into account higher volume sales and utilisation rates.