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Hartalega Holdings
Glove
Neutral
7 August 2013
Analyst Ian Wan ianwwk@alliancefg.com +603 2604 3919
12-month upside potential Previous target price Revised target price Current price (as at 6 Aug) Capital upside (%) Net dividends (%) Total return (%)
Hartalegas 1QFY14 results came in largely within expectation, with annualised core net profit making up 90.2% and 95.4% of ours and consensus full year forecasts. We believe the earnings growth will pick up in the remaining quarters, as Plant 6 was fully completed only in July 2013, increasing overall group capacity by 30%. 1QFY14 revenue grew by 12.2% y-o-y and 3.1% q-o-q, underpinned by higher sales volume (+22.8% y-o-y, +5.2% q-o-q) which was partially offset by lower ASP (-10.4% y-oy, -0.4% q-o-q) due to softer latex cost (-33.0% y-o-y, -17.7% q-o-q). 1QFY14 sales volume represents 22.8% of our full year estimates. In terms of absolute core PBT, the group achieved RM29.2 per thousand gloves in 1QFY14 (-4.6% y-o-y, -4.3% q-o-q), mainly due to :- (1) Volatile foreign exchange rate during the quarter with high and low hitting RM3.22 and RM2.96/USD, although the average exchange rate recorded only -0.2% q-o-q, and (2) Stiffer price competition. Nonetheless, this is in line with our full year estimates of RM29.5 per thousand gloves for FY14 As usual, no dividend declared during the first quarter of the financial year.
Nitrile gloves still enjoy cost advantage of more than 24% in Aug 2013
Going forward, Hartalega anticipates global demand for nitrile gloves to remain stronger than natural rubber (NR) gloves. Based on our estimate, nitrile gloves cost advantage against NR glove has widened from 17% in April 2013 to 24% in Aug 2013. Apart from that, Hartalega plans to manufacture specialty gloves, and thus, expanding and enhancing its product mix. This expansion is expected to be carried in concurrent with NGC (next-generation glove manufacturing complex) project. We currently do not build in any earnings contribution from this expansion yet. In terms of product innovation, Hartalega has invented and patented new coating products, called Coats, which it expects will create new niche market in healthcare, and potentially in the beauty and cosmetic sectors. This oatmeal glove is so far the only lab-proven anti-bacterial glove that is capable of moisturising the skin to make it soft and supple, which appears to be a value-added service in the healthcare industry. On foreign shareholdings level, it has increased from 15.9% in April 2013 to 16.3% in July 2013. Lastly, management has also revealed that the group will appoint one of the top 4 audit firms, Deloitte & Touche as a replacement to its existing external auditors, Baker Tilly.
Forecasts unchanged
As results came within expectation, we leave our forecasts unchanged.
All required disclosure and analyst certification appear on the last two pages of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission
1QFY13 247.7
Comments 1QFY14 revenue growth was mainly driven by sales volume growth (+22.8% yo-y and +5.2% q-o-q) which was partially offset by lower ASP (-10.4% y-o-y and -0.4% q-o-q) as latex cost eased.
Operating profit (RM m) Pretax profit (RM m) Net profit (RM m) Core profit (RM m)
Q-o-q core net profit growth came in weaker than top line, mainly due to (1) volatile foreign exchange rate during the quarter (RM2.96-3.22/ USD), and (2) stiffer price competition.
Per share data EPS (sen) Core EPS (sen) Net DPS (sen) BV/share (RM) Margins Pretax (%) Core profit (%) Other highlights Utilisation rate (%) Sales volume (bn pieces)
17.2 17.2
0.5 0.4
Annualised core EPS represents 90.2% and 95.4% of ours and consensus full year forecasts.
29.5 22.6
28.2 21.5
91.2 2.8
89.5 2.3
22.8
5.2
ASP (RM/ k gloves) Average blended latex price (RM/kg) Absolute core PBT/k gloves (RM) USD:MYR
Utilisation rate remains high at 91%. 1QFY14 sales volume represents 22.8% of our full year estimate. We expect volume to pick up in the remaining quarters as plant 6 (+30% capacity) fully completed in July 2013. ASP declined due to lower input cost.
3.08
3.12
-1.4
-0.2
Absolute core PBT per thousand gloves contracted by 4.6% y-o-y and 4.3% qo-q, implying stiffer price competition. Nonetheless, this is within our expectation. USD against Ringgit has been very volatile during the quarter with the high and low hitting RM3.22/USD and RM2.96/USD respectively, although the average exchange rate for the quarter implying another way, which is -0.2% qo-q.
FY12 931.1 288.2 259.2 258.4 201.4 201.4 27.6 27.6 5.4 24.6 8.0 32.5 Net cash 12.5 1.8 0.85 8.0
FY13 1,032.0 336.2 299.4 304.1 233.3 233.4 31.9 31.9 15.4 21.3 14.0 30.6 Net cash 11.0 1.6 1.04 6.5
FY14F 1,263.5 408.9 363.3 363.7 279.1 279.1 37.4 37.4 105.8 17.3 18.1 12.1 27.4 Net cash 16.8 2.5 1.37 5.0
FY15F 1,368.6 447.6 386.2 386.8 296.8 296.8 38.9 38.9 101.8 3.8 17.5 11.6 24.1 Net cash 17.5 2.6 1.61 4.2
FY16F 1,741.1 550.5 476.2 477.2 366.1 366.1 46.5 46.5 108.8 19.6 14.6 9.6 23.1 Net cash 20.9 3.1 2.01 3.4
Figure 3 : Nitrile butadiene rubber cost advantage widens to 24% vs natural rubber in Aug 2013
Nitrile rubber cost premium/ (discount) to natural rubber
110.0% 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0%
0.0%
May-08
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
May-05
May-06
May-07
May-09
May-10
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Sep-12
*Adjusted for latex content for nitrile butadiene rubber (45%) and natural rubber (60%). Source: Bloomberg data, Alliance Research
May-13
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Price
7.50 7.10 6.70 6.30 5.90 5.50 5.10 4.70 4.30 3.90 3.50 3.10 2.70 2.30 1.90 1.50 1.10 0.70 0.30
Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13
Price
7.50 7.10 6.70 6.30 5.90 5.50 5.10 4.70 4.30 3.90 3.50 3.10 2.70 2.30 1.90 1.50 1.10 0.70 0.30
Feb-09 Apr-09
Feb-12
Aug-08
Aug-09
Aug-10
Aug-12
Aug-11
Feb-13 Apr-13
Feb-10 Apr-10
Feb-11 Apr-11
Oct-08
Oct-09
Oct-12
Oct-10
Oct-11
Jun-09
Jun-10
Jun-12
Dec-08
Dec-09
Apr-12
Min: 0.9
-1Std: 1.9
Avg: 2.96
+1Std: 3.9
Dec-12
Dec-10
Dec-11
14.000
12.000 10.000 8.000 6.000
2.500
2.000 1.500 1.000 0.500 7.6%
9.3%
2.4%
0.5% -1.7%
2.3%
4.000
2.000 -
1QFY11
1QFY12
1QFY13
1QFY14
2QFY11
3QFY11
4QFY11
2QFY12
3QFY12
4QFY12
2QFY13
3QFY13
4QFY13
92.0% 91.0% 90.0% 89.0% 88.0% 87.0% 86.0% 85.0% 84.0% 83.0% 82.0% 81.0% 80.0% 79.0% 78.0%
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14
S.America, 3.5%
Jun-13
Jun-11
Max: 4.8
DISCLOSURE
Stock rating definitions
Strong buy Buy Neutral Sell Trading buy High conviction buy with expected 12-month total return (including dividends) of 30 or more Expected 12-month total return of 15 or more Expected 12-month total return between -15 and 15 Expected 12-month total return of -15 or less Expected 3-month total return of 15 or more arising from positive newsflow. However, upside may not be sustainable
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