Stock Name: HARTA
Company Name: HARTALEGA HOLDINGS BHD
Hartalega (M) Bhd
Aug 8, RM5.44
Maintain buy with target price of RM6.80: Hartalega is likely to outperform its peers for 1QFY12 again, but share prices have been flattish year-to-date (YTD) due to weakness in the sector as a whole. Hartalega is now the new bellwether of the sector with profitability double that of Top Glove Corp Bhd. In our view, Hartalega is not only a high quality stock within the sector (with a 27% profit after tax margin, net cash, 5% dividend yield and 39% return on equity [ROE]), but also on Bursa Malaysia.
We expect the company to post a net profit of around RM55 million (+5%'' quarter-on-quarter, +33% year-on-year) on stronger sales volume (+4% q-o-q, +27% y-o-y) in 1Q. Though the cost of NBR (nitrile butadiene rubber) has gone up 27% q-o-q, margins may see only a minor contraction of around one percentage point (pps) as management partially passed on the higher cost and the company reaped efficiency gains from its new Plant No 5. Additionally, earnings may'' appear unscathed by the weaker US dollar due to its favourable hedging policy.
The ongoing switch to nitrile gloves from latex is aggressive. Europe now accounts for 21% of Hartalega's overall sales from 15% in 2HFY11. Although NBR price is at its high of US$2.08 per kg (54% increase YTD), Hartalega's nitrile glove average selling price (ASP) remains competitive at around a 30% discount to latex powder free. Concern over a US slowdown affecting Hartalega's sales to the US, 70% of its total sales, is unwarranted as rubber gloves are a necessity consumable.
However, earnings momentum may slow in the coming quarters as the company may absorb some of the cost inflation to keep its ASP competitive. There is little upside to sales volume as its plants are close to full utilisation. Our earnings model has already incorporated for a 4pps to 5pps earnings before interest, tax, depreciation and amortisation (Ebitda) margin contraction (from FY11) in FY12/FY13. Nevertheless, y-o-y earnings growth of 9% to 15% in FY12/FY13 is still remarkable, despite coming from a high base.
Though stock liquidity, six-month average daily volume of 350,000, is relatively lower than its peers, it is still acceptable for most local funds. Moreover, its potential dividend yield of 4.7% (FY12) is the highest among its peers and we see room for a higher payout given its high ROE and free cash flow yield. We maintain our forecasts of RM6.80 using discounted cash flow-derived target price, which indicates a CY12 price-earnings ratio of 11 times against Top Glove's five-year average of 15 times and current CY12 PER of 20 times. ' Maybank IB Research, Aug 8
This article appeared in The Edge Financial Daily, August 9, 2011.
Company Name: HARTALEGA HOLDINGS BHD
| Research House: MAYBANK | Price Call: BUY | Target Price: 6.80 |
Hartalega (M) Bhd
Aug 8, RM5.44
Maintain buy with target price of RM6.80: Hartalega is likely to outperform its peers for 1QFY12 again, but share prices have been flattish year-to-date (YTD) due to weakness in the sector as a whole. Hartalega is now the new bellwether of the sector with profitability double that of Top Glove Corp Bhd. In our view, Hartalega is not only a high quality stock within the sector (with a 27% profit after tax margin, net cash, 5% dividend yield and 39% return on equity [ROE]), but also on Bursa Malaysia.
We expect the company to post a net profit of around RM55 million (+5%'' quarter-on-quarter, +33% year-on-year) on stronger sales volume (+4% q-o-q, +27% y-o-y) in 1Q. Though the cost of NBR (nitrile butadiene rubber) has gone up 27% q-o-q, margins may see only a minor contraction of around one percentage point (pps) as management partially passed on the higher cost and the company reaped efficiency gains from its new Plant No 5. Additionally, earnings may'' appear unscathed by the weaker US dollar due to its favourable hedging policy.
The ongoing switch to nitrile gloves from latex is aggressive. Europe now accounts for 21% of Hartalega's overall sales from 15% in 2HFY11. Although NBR price is at its high of US$2.08 per kg (54% increase YTD), Hartalega's nitrile glove average selling price (ASP) remains competitive at around a 30% discount to latex powder free. Concern over a US slowdown affecting Hartalega's sales to the US, 70% of its total sales, is unwarranted as rubber gloves are a necessity consumable.
However, earnings momentum may slow in the coming quarters as the company may absorb some of the cost inflation to keep its ASP competitive. There is little upside to sales volume as its plants are close to full utilisation. Our earnings model has already incorporated for a 4pps to 5pps earnings before interest, tax, depreciation and amortisation (Ebitda) margin contraction (from FY11) in FY12/FY13. Nevertheless, y-o-y earnings growth of 9% to 15% in FY12/FY13 is still remarkable, despite coming from a high base.
Though stock liquidity, six-month average daily volume of 350,000, is relatively lower than its peers, it is still acceptable for most local funds. Moreover, its potential dividend yield of 4.7% (FY12) is the highest among its peers and we see room for a higher payout given its high ROE and free cash flow yield. We maintain our forecasts of RM6.80 using discounted cash flow-derived target price, which indicates a CY12 price-earnings ratio of 11 times against Top Glove's five-year average of 15 times and current CY12 PER of 20 times. ' Maybank IB Research, Aug 8
This article appeared in The Edge Financial Daily, August 9, 2011.
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