August 10, 2011

A prosperous quarter for Hartalega

Stock Name: HARTA
Company Name: HARTALEGA HOLDINGS BHD
Research House: MIDFPrice Call: BUYTarget Price: 6.36



Hartalega Holdings Bhd
(Aug 10, RM5.51)
Upgrade to buy at RM5.39 with revised target price of RM6.36 (from RM6.28): Hartalega's 1QFY11 net profit of RM54.7 million exceeded our expectation, although it was within consensus, accounting for 30% of our and 26% of consensus' full-year forecasts. No dividend was declared during the quarter.

The higher sales were driven by: (i) better sales volume of nitrile as customers are switching from rubber gloves to nitrile; (ii) commissioning of its 10 lines in Plant 5 that boost capacity to nine billion pieces by end-2011; and (iii) effective cost control and improvements to the production process.

Hartalega's 1QFY11 earnings before interest and tax (Ebit) margin added 0.4 percentage points to 32.4%, translating into a 30.8% year-on-year Ebit growth to RM71.2 million. The strong margin growth was mainly lifted by the growing demand in Europe which accounted for 28% of Hartalega's total sales as opposed to 18% from the same period last year.

As at December 2010, demand in Asia-Pacific accounted for about 10% of Hartalega's market segment. Subscribing to a stake in Yan Cheng Pharmatex Medical Equipment Co Ltd will help the company expand its wings further in the China market.

Yan Cheng Pharmatex is a China-based company and its main operations are the export, import, wholesale and distribution of examination gloves.

Hartalega will pay the total consideration of RM319,410 for the 70% stake in cash with internally generated funds, according to management. As at end-June 2011, Hartalega had a net cash position of RM100.3 million.

Hartalega is expecting nitrile glove demand to continue to grow by 30% for FY11. Correspondingly, it is targeting to expand Plant 5 with an additional two production lines that are expected to start commissioning in early FY12. In addition, Hartalega is planning to build a new plant next to its existing plants in Bestari Jaya, for which approval is still pending.

We are revising upwards our earnings forecast by 15.3% to reflect better than expected demand for nitrile.

All considered, we upgrade our recommendation from 'trading buy' to 'buy' with a higher target price of RM6.36 per share. We are ascribing a lower 2012 earnings per share multiple of 11 times (previous multiple of 14 times) based on Hartalega's three-year average historical PER. ' MIDF Research, Aug 10


This article appeared in The Edge Financial Daily, August 11, 2011.

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