August 10, 2010

HARTA - Maybank Research sees Hartalega reporting RM42m net profit

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

KUALA LUMPUR: Maybank IB Research expects Hartalega Bhd, which will release its earnings on Tuesday, Aug 10, to likely meet its expectations of around RM42 million net profit'' (+59% YoY, -9% QoQ).

It said though overcrowding is a concern, it thinks Hartalega has the operating scale, market share, superior margins (7-18 percentage points premium to peers) and track record to defend against this short to mid-term setback better than smaller scale peers/new start-ups.

Maintain Buy and DCF-based TP of RM10.10.

Maybank Research said YoY growth is believed to have been derived from higher sales volume (estimated +25% YoY) owing to the commercialisation of two new lines at Plant 5 in 4QFY10 (+10% to 6.4 billion pieces per annum).

On a QoQ basis, earnings is expected to fall 9% due to lower effective tax rate in 4QFY10 (18% vs. 9MFY10 of 20%) and time-lag in passing on higher nitrile cost. Latex and nitrile costs peaked in Apr-May '10 at RM7.50/kg and RM4.50/kg respectively.

'In conjunction with the current fundamental demand shift to nitrile gloves (from latex) on lower ASPs (5-15% discount to powder free latex), glove-makers (i.e. Kossan, Adventa are also expanding their nitrile capacities,' it said.

Maybank Research said in the coming quarters, glove makers might offer more competitive ASPs to utilise their new capacities, leading to a price war.

'However, we think Hartalega has the margin strength (7-18-ppt premium to peers) to battle this out. We have factored in this concern, on declining EBIT margin trend,' it said.


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