Hartalega’s 4QFY14 net profit likely to be 12%-16% weaker

by **Cals** Wed 23 Apr 2014, 22:27

Business & Markets 2014

Written by Kenanga Research

Wednesday, 23 April 2014 11:14

Hartalega Holdings Bhd
(April 22, RM6.41)
Maintain outperform with target price of RM7.48: Hartalega’s results for the fourth quarter ended March 31 of financial year 2014 (4QFY14) are expected to be announced on May 6. While sales volumes could have grown a commendable 10% to 12% quarter-on-quarter (q-o-q), which is a stark contrast to peers like Top Glove Corp Bhd whose volume declined by 7% q-o-q, 4QFY14 net profit will likely be weaker between 12% and 16% q-o-q; bringing full-year FY14 profit after tax to RM230 million to RM240 million or 6% to 11% below our and consensus’ estimates.

The culprit is cost pressure emanating from higher plant maintenance.

Higher sales of latex-based gloves, which currently account for 10% compared to 5% previously, also contributed to the lower margins. Looking ahead, with its existing plants running at optimum capacities, sales volumes will remain relatively flattish at least until 3QFY15.

Hartalega highlighted that its next generation integrated glove manufacturing complex (NGC) in Sepang, Selangor is on track to commission operations gradually from October 2014 onwards with a planned commissioning of two lines per month. Upon full commissioning, the first two plants will add new capacity of about eight billion pieces (+56%) by October 2015, providing the much-needed earnings growth for FY16.

Hartalega appears relatively confident that capacities for the first plant will be absorbed upon commissioning. We understand that a major client has been secured to take up a sizeable portion of the production from the first plant.

Industry-wise, Hartalega expects: (i) double-digit demand growth for nitrile gloves (15% to 20% for 2014 and 2015; 10% to 15% for 2016 to 2018); and (ii) to preserve market share once the new capacities come onstream from October 2014 onwards.

The recent gas price hike translates into a small 1% to 1.5% increase in average selling price (ASP) for full pass-through but with the short lead time between the date the new rates were announced (mid-April) and the effective date (May 1), the revised ASPs will only apply to orders from June onwards, resulting in Hartalega “absorbing” the incremental cost only from May.

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We are downgrading our FY14 and FY15 earnings forecasts by 10% to 12% taking cue from lower margin (net margin reduced from 21% to 18%) due to higher than expected cost in 4QFY14 as explained above. — Kenanga Research, April 22

This article first appeared in The Edge Financial Daily, on April 23, 2014.