Demand for Hartalega’s nitrile gloves remains intact

by **Cals** Wed 05 Feb 2014, 10:53

Demand for Hartalega’s nitrile gloves remains intact
Business & Markets 2014
Written by Maybank Investment Bank
Wednesday, 05 February 2014 10:10

Hartalega Holdings Bhd
(Feb 4, RM7.00)
Maintain hold with target price unchanged at RM7.10: Demand for nitrile (NBR) gloves remains intact despite increasing competition from latex gloves. While the price of latex has plunged 13% year-to-date (YTD), the price of NBR has remained unchanged thus far. The price differential has narrowed with NBR trading at a 6% discount to latex from the 18% discount in December 2013.

Nevertheless, demand for nitrile gloves remains solid despite its average selling price (ASP) premium of around 5% to 7% over the powder-free latex gloves.

We think the demand for nitrile gloves will stay persistently strong going forward, supported by demand from the US and European markets, which are more inclined to pay for quality.

Hartalega has fully sold its capacity for the next three months and earnings will likely be capped at current levels until its massive new capacity (+34%) starts to kick in sometime in August 2014.

Its core profit for third quarter ended Dec 31, 2013 of financial year 2014 (3QFY14) could be slightly weaker (potentially -5% quarter-to-quarter [q-o-q] to RM60 million) due to maintenance works that have affected production, but earnings are still on track for our full-year numbers.

Trading at a calendar year 2014 price-earnings ratio of 19 times, we think Hartalega’s current valuation is already fair. There is no change to our earnings forecasts, “hold” rating and target price of RM7.10.

YTD, the price of latex has fallen 13% (-23% year-on-year [y-o-y]) while NBR has remained unchanged at US$1.10 (RM3.66) per kg (-27% y-o-y).

Barring any sharp decline in latex price (which may cause a sharp drop in latex gloves’ ASP), we believe new demand will still favour nitrile gloves. The global demand for nitrile gloves is expected to grow by about 15% to 20% this year.

Earnings growth of 13% in FY15 is supported by new capacity from August 2014 onwards, but with full warrants conversion, earnings per share is expected to expand at a slower 4%. We maintain “hold” with target price unchanged at RM7.10. — Maybank Investment Bank, Feb 4

This article first appeared in The Edge Financial Daily, on February 05, 2014.