April 29, 2010

HARTA - Hartalega's outperformance to continue

Stock Name: HARTA
Company Name: HARTALEGA HOLDINGS BHD
Research House: MAYBANK

Hartalega Holdings Bhd
(April 28, RM7.80)
Maintain buy at RM7.90 with target price raised to RM10.10
: We expect strong earnings in the fourth quarter (4Q) of financial year ended March 31, 2010
(FY10). Discounted-cash-flow-based (DCF) target price raised by 22% to RM10.10.

Underlying strength, based on operating efficiencies and economies of scale, is sustainable into FY12.

Overcapacity concerns are overplayed as customers would continue to fall back on proven and trusted original equipment manufacturers (OEMs) like artalega, assured of product quality and delivery. In fact, Hartalega may gain market share should a price war ensue.

Earnings could surpass estimates. We see 4QFY10 core net profit growing a spectacular 18% to 24% quarter-on-quarter (q-o-q) to RM44 million-RM46 million, ahead of our earlier projected RM39 million, which would bring full-year net profit to RM141 million to RM143 million or in percentage terms 78% to 80% year-on-year (y-o-y).

Growth would come from a higher sales volume after the commercialisation of two new lines at Plant 5 in the first quarter of 2010, which will increase capacity by 564 million pieces a year to 6.44 billion pieces a year.

Also, earnings before interest and tax (Ebit) margins would expand one to two percentage points q-o-q, from lower material costs (latex) and higher average selling price (ASP). We also expect a final dividend per share (DPS) of nine sen to 10 sen, bringing FY10 payout to 20 sen (+100% y-o-y; 34% net profit payout).

FY10 to FY12 earnings forecasts have been raised 5% to 23%. This is based on the anticipated sterling 4QFY10 performance, higher ASP of 1%-17% y-o-y, and improving plant utilisation (+3 percentage points y-o-y to 88%).

The higher ASP is on the back of higher latex prices and the stronger ringgit which would be fully passed on. Hartalega has successfully raised production for its new Plant 5 to 33,000 pieces/hr from 30,000 pieces.

Our earlier forecast incorporated the lower output. Earnings before interest, tax, depreciation and amortisation (Ebitda) margins should fall by 0.8-2.4 percentage points y-o-y, after incorporating RM8 million expenses on ESOS (3.5 sen earnings per share or EPS) per annum, to be realised from FY11.

A planned Plant 6 is expected to lift visibility beyond FY12. Plant 5 will be fully operational by 3QFY11, contributing 2.8 billion pieces per year. artalega has earmarked Plant 6 for its expansion programme, solely intended for natural rubber gloves. Total production will reach 9.5 billion pieces per annum by 2012 should Plant 6 be commercialised. - Maybank IB, April 28


This article appeared in The Edge Financial Daily, April 29, 2010.

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