Hartalega Holdings capitalises on nitrile gloves

by **Cals** Mon 08 Apr 2013, 10:18

Hartalega Holdings capitalises on nitrile gloves
Business & Markets 2013
Written by theedgemalaysia.com
Monday, 08 April 2013 10:10

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HARTALEGA HOLDINGS BHD []
(April 5, RM5.13
Initiate coverage at RM4.90 with a buy rating and target price of RM5.50: We initiate coverage on Hartalega with a “buy” recommendation which is based on a 25% premium to the industry’s targeted price-earnings ratio (PER) of 12 times.

The assumed premium is justified by Hartalega’s efficiency, nitrile capacity and industry high operating margin. Hartalega currently pays out around 45% of net profit. Considering proceeds from capital gains and dividends, this provides a potential total upside of 16%.

Hartalega is the largest synthetic rubber glove manufacturer in the world. It produces 11 billion gloves a year, of which 90% or 9.9 billion are nitrile gloves.

This places the company in an excellent position to capitalise on the recent upsurge in the demand for nitrile gloves. By boosting efficiency and through automation, Hartalega boasts an operating profit margin of 33%, which is currently the highest in the industry.

To maintain its edge, Hartalega plans to boost capacity through the installation of Plant 6, which will increase production capacity by 30% to 14 billion.

Apart from that, Hartalega has also initiated the next generation integrated glove manufacturing complex (NGC), which will be completed by 2021. Once operational, it will approximately quadruple the current capacity to 42.5 billion gloves per annum.

The NGC is expected to further improve efficiency in the face of increasing competition as other glove players increase their nitrile capacity.
Our broad assumptions for the 2013 to 2015 financial years (FY13-FY15) are as follows: i) commissioning of Plant 6 and Plant 7 as scheduled; ii) a decline in utilisation rate to 85% due to increased competition; iii) average selling price of nitrile gloves to decline at a rate of 2.5% every year; and iv) rising nitrile butadiene rubber (NBR) prices at a rate of 2.5% per year from its FY13 average of RM5.85 per kg; and 5) Average prices of natural rubber and latex gloves to remain stable at RM6.30 per kg and RM124 per 1,000 pieces, and average prices of NBR to track closely the price of natural rubber. — TA Securities, April 5

This article first appeared in The Edge Financial Daily, on April 8, 2013.