Strong capacity upgrades will not result in oversupply for Hartalega as demand should absorb it
KUCHING: With a 12.1 billion pieces capacity production increase expected for rubber glove manufacturer Hartalega Holdings Bhd (Hartalega) for 2018, there has been some concern of oversupply issues within the industry but the group is believes that current demand will be enough to absorb the incremental supply increase.
In a recent company update report, the research arm of Affin Hwang Investment Bank Bhd (AffinHwang Capital) detailed that they had left a recent meeting with Hartalega’s management feeling upbeat on the rubber products industry.
“By end of 2020 with the completion of the Next Generation Integrated Glove Manufacturing Complex ( NGC), Hartalega’s overall production capacity would rise to 44.6 billion pieces from the 32.5 billion pieces currently.
“There are some delays to the start of Plant 6 and 7, which will add around 7.3 billion or circa 22 per cent to its current capacity. However, this is still within our expectations.
“Nevertheless, Plant 5 has started production, and management is targeting full production by yearend, effectively adding around 4.7 billion or circa 14 per cent to its capacity. Hartalega is currently operating at 90 per cent utilisation rate,” reported the research arm.
While the increase in production capacity is pretty significant, Hartalega’s management has guided that they are not worried that this will lead to an overcapacity as the current demand is able to absorb the incremental supply.
“Management does not think that there will be an oversupply looming the industry moving into the second half of 2018 (2H18), as demand for rubber glove remains robust, echoing our positive view on the sector,” said the research arm.
Addit ionally, the recent weaknesses in Ringgit is expected to be beneficial to all players in the rubber products sector as Affin Hwang Capital opines that it can help to ease the need to raise average selling prices (ASP) as production costs continue to be a concern.
“Even without positive impact from the currency, manufacturers would still be able to pass on the higher cost, in our view,” said the research arm.
Al l things considered, AffinHwang capital has decided to tweak their earnings per share (EPS) forecast by 0.3 to 0.4 per cent to factor ion the impact of currency and progress of the group’s plant 5, and following that, increasing their target price on the stock from RM5.55 to RM6.30.
Despite their significant increase in their target price, AffinHwang Capital maintained its hold call on the stock due to its limited upside.
“The risk to our investment thesis lies in a sharp movement in the ringgit, and unexpected changes to production cost,” concluded the research arm.