Hartalega’s nine-month profit below expectations

Research house: It’s only 71% of full-year consensus forecast

PETALING JAYA: Glovemaker Hartalega Holdings Bhd’s net profit in the first nine months ended Dec 31, 2018 (9M19) came in below consensus expectations, despite having increased by 13% year-on-year (y-o-y).

According to Kenanga Research, Hartalega’s net profit of RM364.8mil in the nine-month period was only 71% of the consensus’ fullyear forecast.

However, it came in within the research house’s forecast at 75%.

Kenanga Research hinted that Hartalega may yield a potential slower set of results in subsequent quarters, given the normalising demand and intensified competition in the nitrile gloves segment.

“Anecdotal evidence suggests that shorter delivery lead time does indicate that strong demand is tapering off and players ramping up production could result in further average selling price (ASP) pressure.

“From our channel checks, we gather that competition in the nitrile gloves segment has intensified, leading to pressures on the ASP,” it said in a note yesterday.

Hartalega’s revenue in 9M19 rose by 20% y-o-y due to higher sales volume and ASP.

The net profit increased by 13% y-o-y , also supported by lower effective tax rate of 16.7% compared with 17.5% a year earlier.

Kenanga Research has upgraded its recommendation on the stock to “market perform”, following the share price retracement by 28% from its peak last year.

The brokerage’s target price remained unchanged at RM5.15 per share.

Meanwhile, AmInvestment Bank Research downgraded its call on Hartalega to “hold”, with a slightly lower fair value of RM5.80 per share.

The research firm has also revised its forecasts downwards for the financial years of 2019, 2020 and 2021 by 1.6%, 2.5% and 2.9% respectively.

They were lowered to account for the slightly lower earnings before tax, interest, tax, depreciation and amortisation or Ebitda margin expectation of 24.6% in FY19.

“Since our call upgrade (“buy” on Jan 11, 2019), Hartalega’s share price has increased 7.7% from RM5.06 to RM5.45. As such, we opine that Hartalega is now close to its full valuation,” stated AmInvestment Bank Research.

It also said that Hartalega’s net profit of RM364.8mil in 9M19 met its estimate, accounting for 71.3% of its full-year forecast.

“We continue to like Hartalega for the management’s foresight and execution, its visible capacity expansion, product innovation and superior operating efficiencies.

“Hartalega is currently working to secure the Food and Drug Administration’s approval to market its antimicrobial gloves in the United States, which is expected to be obtained by end-2019,” it said.

AmInvestment Bank Research pointed out that Hartalega has commissioned six out of 12 lines in its plant five, which is targeted to be fully commissioned by the first half of this year.

As for plant six, it is expected to start commissioning in the second half of 2019, while the construction of plant seven will start in May.

“The company’s efficiency will only continue to increase with the addition of its latest plants,” said the research house.

From our channel checks, we gather that competition in the nitrile gloves segment has intensified, leading to pressures on the average selling price.

Kenanga Research