HARTALEGA HOLDINGS BHD

Revised target price: RM6.99

MIDF expects Hartalega’s earnings to remain resilient in 2018 as it anticipates new demand to come from China due to the switch from vinyl gloves to rubber gloves.

“The continuous switch in demand for powdered gloves to non-powdered gloves and nitrile gloves has allowed demand to remain resilient. Furthermore, we opine that revenue will also continue to be supported by the slower growth in the glove industry’s capacity expansion which has provided Hartalega with a more conducive environment to price its product,” it said.

MIDF said this was in contrast to the intense pricing competition last year which caused the glove manufacturers to reduce prices in order to compete for orders. From its observation, the research house said natural rubber price has been steadily coming down from its peak of RM8.16 per kg back in February.

“As of 30 June, the average price of natural rubber stands at RM5.73 per kg. This means that Hartalega would have to adjust its average selling prices (ASPs) lower to accommodate for lower raw materials price.

“However, despite the expected lower ASPs, we think that the new capacity from Plant 3 will assist to offset the lower ASPs going forward as demand is expected to remain resilient,” it said.

Post earnings revision, MIDF said it is maintaining its neutral call on Hartalega with a revised target price of RM6.99 per share (from RM5.07 per share previously) as it rolls forward its valuation base year to 2019.

“In addition, we continue to be wary of the ongoing strengthening of ringgit against the dollar as well as the drop in raw materials price which could distort its revenue. Furthermore, its share price has gone up by 44% year-to-date, which limits further share price appreciation in our opinion,” it added.