Results Preview Maybank expects weak 4Qresults from Hartalega

by **Cals** Fri 18 Apr 2014, 02:26

Results Preview Maybank expects weak 4Qresults from Hartalega

Business & Markets 2014

Written by Ahmad Naqib Idris Adzman Shah of theedgemalaysia.com

Thursday, 17 April 2014 11:36

KUALA LUMPUR (Apr 17): Maybank Investment Bank Bhd has maintained “hold” on Hartalega Holdings Bhd at RM6.48 but has lowered its target price to RM6.70 from RM7.10 as it expects weak fourth quarter (4QFY14) results from the glove firm.

The research house said in a note today that it expected Hartalega to register weaker, below expectations net profit quarter-on-quarter (q-o-q) for 4QFY14.

“While its sales volume could have risen by 10% q-o-q, its net margin may have fallen by 4 percentage points as a result of price competition, higher expansion expenses, and a higher effective tax rate,” said the research house.

Maybank added that there may also be some unrealised foreign exchange losses in 4QFY14.

However, the research house sees no major impact on Hartalega’s earnings from the hike in gas prices, as gas only accounts for 5% of total costs.

“While we do not expect the higher gas costs to be passed through immediately, the adverse impact to the bottomline is insignificant -- at less than 1%,” said the company.

On oversupply concerns in the market, the research house said it was a recurring concern every two to three years that had never resulted in a sharp earnings decline.

It added that industry players could scale back expansion plans if demand did not meet supply.

“Based on the proposed expansion plans, it does look like there will be another industry-wide overcapacity situation with a supply surplus of at least 1 billion and 4 billion pieces per annum in 2014 and 2015 respectively, assuming global demand growth of 7.6%, 7.4% and 7.2% in 2014, 2015 and 2016 respectively.

“However, we highlight that the new capacity will only be added progressively as the glove makers monitor demand and will scale back their expansion if demand comes in below expectations,” said Maybank.

The research house said that the average selling price (ASP) of gloves could be raised again once the new industry capacity was filled.

Going forward, Maybank foresees rising demand for nitrile gloves in developed markets such as Europe as the market is less price-sensitive, with a low penetration rate of nitrile gloves.