Hartalega may post weaker 4Q net profit

by **Cals** Fri 18 Apr 2014, 12:28

Business & Markets 2014

Written by Maybank IB Research

Friday, 18 April 2014 10:04

Hartalega Holdings Bhd
(April 17, RM6.44)
Maintain hold with target price of RM6.70: Hartalega’s results for the fourth quarter ended March 31 of financial year 2014 (4QFY14) will be announced on May 6.
Meanwhile, the average selling price (ASP) of nitrile gloves has been on a downtrend (1Q of 2014: about -3% quarter-on-quarter [q-o-q]) due to the falling nitrile butadiene rubber input price and also price competition. In addition, investors are spooked by the industry’s aggressive expansion plans and the recently announced 20% gas tariff hike, effective May 1.
We expect Hartalega’s 4QFY14 net profit to be weaker q-o-q (3QFY14: RM54 million), below our and market expectations. While its sales volume could have risen by about 10% q-o-q, its net margin may have fallen by about four percentage points (ppts) as a result of price competition, higher expansion expenses and a higher effective tax rate.
Additionally, there could also be some unrealised foreign exchange losses. While we do not expect the higher gas costs to be passed through immediately, the adverse impact on the bottom line is insignificant at less than 1%.
Also, we think the present ASP competition could be just a temporary blip as the ASP can be raised again when the industry’s new capacity is partially filled.
Moreover, the industry’s expansion plans can still be scaled back if demand is not as great.
We lower our FY14 to FY16 earnings per share forecasts by 13%, 23% and 14% respectively to impute for higher tax rates in FY14 and FY15 (+1ppt), margin pressure (-1ppt) in FY15 and FY16 and a delay in its expansion.
Hartalega’s long-term prospects remain promising on the commercialisation of its new plants, which will boost its sales volume and margins. — Maybank IB Research, April 17

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This article first appeared in The Edge Financial Daily, on April 18, 2014.