Hartalega’s earnings gaining momentum

KUCHING: Hartalega Holdings Bhd’s ( Hartalega) growth prospects have been viewed positively by analysts, underpinned by demand uptick with nascent signs of a strong volume growth rebound.

In a report, the research team at Kenanga Investment Bank Bhd ( Kenanga Research) expect a third consecutive quarterly earnings improvement.

“Tell-tale signs of pent-up demand for nitrile gloves, potentially on re- stocking activities based on industry longer delivery lead times are pointing towards a better sequential quarter in the third quarter of the financial year 2020 ( 3QFY20),” it opined.

Based on its analysis, it expect nitrile gloves to continue growing and grabbing market share from latex gloves.

“The growth in nitrile segment is evident. For illustration purposes, going forward, assuming nitrile: latex breakdown of 80: 20 (current is 67: 37) and based on estimated global demand of 324 billion pieces in 2020 (forecast for 2019 is 300b pieces and assuming 8% growth rate in 2020), this implies nitrile growth rate of 30 per cent or an additional 51 billion pieces from switch to nitrile gloves.

“Hartalega’s 2QCY19 results showed strong volume growth (up 14 per cent quarter- onquarter) indicating a solid recovery in demand. From our ground checks, demand for nitrile gloves is picking up again where players’ new capacities are being swiftly taken up.

“The application of higher standards of hygiene to rein in the outbreak of the new Wuhan virus is expected to help ramp up re- stocking activities. Ceteris paribus, a one per cent increase in volume sales will raise our FY21E net profit by 1.2 per cent,” it explained.

It also noted that Hartalega’s capacity expansion is on track.

“The first line of Plant 6 ( installed capacity of 4.7 billion pieces) has commenced commercial operations and the remaining 11 lines are expected to be gradually ramped up. Plant 7 is expected to be commissioned by 2H20, which will focus on small orders as well as specialty products with an annual installed capacity of 3.4 billion pieces.

“All in, Plant 5, 6 and 7 will add a total capacity of 12.1 billion pieces, raising installed capacity by 27 per cent to 44.6 billion pieces per annum,” it said.

Kenanga Research retained its ‘ outperform’ rating on the stock.