Stock Name: HARTA
Company Name: HARTALEGA HOLDINGS BHD
Research House: CIMB
Rubber gloves
Maintain overweight: Taking our cue from higher latex prices, we raise our CY11/13 price assumptions by 5% to 7% for nitrile and 9% to 10% for rubber latex. This reduces our FY11/12 sector net profit by 8% to 9%. Despite the earnings cut and the disappointing results season, we continue to rate the sector an 'overweight' as the headwinds have left the sector's CY12 price-earnings ratio (PER) at 8.5 times or about 30% below the KLCI's 12.7 times PER.
This is despite a three-year earnings per share (EPS) compound annual growth rate of 11%, which is supported by 8% to 15% annual demand growth. Kossan Rubber Industries Bhd replaces Hartalega Sdn Bhd as our top pick, given Hartalega's margin compression and better upside for Kossan.
Potential re-rating catalysts for the sector include higher outsourcing and lower input costs.
Annualised net profit for the companies under coverage missed expectations, coming in at just 78% of our estimates and 82% of consensus. Results were weighed down by a 64% year-on-year (y-o-y) slump in Top Glove Corp Bhd's 2QFY11 net profit due to higher input cost and weak demand.
Sector revenue for the quarter fell 2% quarter-on-quarter (q-o-q) because of higher sales of nitrile gloves which have lower selling prices. On a y-o-y basis, revenue rose 16% due to capacity expansion. But rising costs pulled the sector net profit down 24% q-o-q and 220% y-o-y.
After peaking at RM10.89 per kg on Feb 22, rubber latex price fell 21% in two weeks to RM8.56 per kg on the back of growth concerns. The fall was accentuated by disruptions to global supply chains after Japan's earthquake. But the rubber price fall was short-lived as prices bounced back with a vengeance, rising 24% in just over a week to RM10.65 per kg as at April 4.
Nitrile latex producers raised prices around the same time (by about 10% in March) as midstream refiners battled with a Brent price of above US$100 per barrel. Even so, the volatility of rubber has renewed interest in glove stocks, which have been out of favour lately.
Glovemakers can mitigate the cost volatility by diversifying their product mix. While customers in regulated markets such as the US and EU are unlikely to change buying behaviour, emerging market end-users are more fickle. Glovemakers with a balanced product mix such as Kossan (40:60 nitrile:rubber mix) are best positioned to meet demand from growth markets in emerging Asia and Latin America.
We like Kossan and Hartalega. Kossan is the most balanced glovemaker, has consistently met expectations and offers more upside than Hartalega. Despite offering 21% EPS growth for FY12, the stock trades at only 6.5 times forward PER. While it is true that Hartalega will continue to benefit from the switch to synthetics, we expect its margin to contract in FY12 as refiners start raising prices. ' CIMB Research, April 5
This article appeared in The Edge Financial Daily, April 6, 2011.
Company Name: HARTALEGA HOLDINGS BHD
Research House: CIMB
Rubber gloves
Maintain overweight: Taking our cue from higher latex prices, we raise our CY11/13 price assumptions by 5% to 7% for nitrile and 9% to 10% for rubber latex. This reduces our FY11/12 sector net profit by 8% to 9%. Despite the earnings cut and the disappointing results season, we continue to rate the sector an 'overweight' as the headwinds have left the sector's CY12 price-earnings ratio (PER) at 8.5 times or about 30% below the KLCI's 12.7 times PER.
This is despite a three-year earnings per share (EPS) compound annual growth rate of 11%, which is supported by 8% to 15% annual demand growth. Kossan Rubber Industries Bhd replaces Hartalega Sdn Bhd as our top pick, given Hartalega's margin compression and better upside for Kossan.
Potential re-rating catalysts for the sector include higher outsourcing and lower input costs.
Annualised net profit for the companies under coverage missed expectations, coming in at just 78% of our estimates and 82% of consensus. Results were weighed down by a 64% year-on-year (y-o-y) slump in Top Glove Corp Bhd's 2QFY11 net profit due to higher input cost and weak demand.
Sector revenue for the quarter fell 2% quarter-on-quarter (q-o-q) because of higher sales of nitrile gloves which have lower selling prices. On a y-o-y basis, revenue rose 16% due to capacity expansion. But rising costs pulled the sector net profit down 24% q-o-q and 220% y-o-y.
After peaking at RM10.89 per kg on Feb 22, rubber latex price fell 21% in two weeks to RM8.56 per kg on the back of growth concerns. The fall was accentuated by disruptions to global supply chains after Japan's earthquake. But the rubber price fall was short-lived as prices bounced back with a vengeance, rising 24% in just over a week to RM10.65 per kg as at April 4.
Nitrile latex producers raised prices around the same time (by about 10% in March) as midstream refiners battled with a Brent price of above US$100 per barrel. Even so, the volatility of rubber has renewed interest in glove stocks, which have been out of favour lately.
Glovemakers can mitigate the cost volatility by diversifying their product mix. While customers in regulated markets such as the US and EU are unlikely to change buying behaviour, emerging market end-users are more fickle. Glovemakers with a balanced product mix such as Kossan (40:60 nitrile:rubber mix) are best positioned to meet demand from growth markets in emerging Asia and Latin America.
We like Kossan and Hartalega. Kossan is the most balanced glovemaker, has consistently met expectations and offers more upside than Hartalega. Despite offering 21% EPS growth for FY12, the stock trades at only 6.5 times forward PER. While it is true that Hartalega will continue to benefit from the switch to synthetics, we expect its margin to contract in FY12 as refiners start raising prices. ' CIMB Research, April 5
This article appeared in The Edge Financial Daily, April 6, 2011.
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