Stock Name: HARTA
Company Name: HARTALEGA HOLDINGS BHD
Rubber gloves
Maintain overweight: After four sequential quarters of earnings decline, rubber glove manufacturers posted their first quarter-on-quarter (q-o-q) growth in 2QCY11. Aggregate core net profit for Top Glove Corp Bhd, Supermax Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Sdn Bhd grew by 2.2% q-o-q, on the back of a 7.9% q-o-q increase in revenue.
Hartalega reported another strong quarter ' core net profit grew by 4.5% q-o-q, attributed primarily to higher sales volume (9.3% q-o-q) and higher average selling prices (7.4% q-o-q). Excluding Hartalega, aggregate earnings of natural rubber glove manufacturers grew, albeit by a marginal 0.6% q-o-q.
The 2QCY11 results for natural rubber glove manufacturers were largely characterised by: (i) lower latex prices. Average latex prices slid by 4.3% q-o-q in 2QCY11, easing cost pressure; (ii) improvement in earnings before interest and tax (Ebit) margins. Top Glove's Ebit margin remained steady at 6.4% (1QCY11: 6.4%), while Supermax added 0.4 percentage points to 8% (1QCY11: 7.6%); and (iii) lower than usual utilisation rates, specifically for Kossan and Supermax, due to the closure of certain plants for upgrading and refurbishment. Utilisation rates should gradually revert back to normal by 4QCY11.
As our earnings forecasts were up to 24% below consensus prior to the August 2011 reporting season, results were largely within our expectations though below consensus. Kossan, however, was below our expectation due to lower than expected utilisation rate. We made no changes to our earnings forecasts for Top Glove and Hartalega.
For Kossan, taking into account the lower utilisation rate and lower than expected 2QCY11 results, our FY11 to FY13 net earnings forecasts were cut by between 5% and 14%.
We make no change to our FY11 core net profit forecast of RM110 million for Supermax. After factoring in the delay of Glove City to FY14 and the addition of two new plants between FY12/FY13, our FY12/FY13 net earnings forecasts were lowered by 7% to 9%.
With signs of recovery finally emerging, we maintain our 'overweight' stance on the sector. We expect glove manufacturers' sequential earnings to improve on the back of: (i) lower and less volatile latex prices; (ii) higher utilisation rates as well as increased production as additional capacity expansion comes onstream in 4QCY11, and; (iii) continued steady demand growth.
Hartalega ('buy', target price: RM7.33) is our top pick for the sector, for: (i) its high Ebit margin of above 30%; (ii) insulation from volatile latex prices, and; (iii) consistent earnings delivery and strong operational efficiency. We also maintain our 'buy' recommendations for Supermax (TP: RM4.36) and Kossan (TP: RM4.18) on attractive valuations. Top Glove remains a 'reduce' (TP: RM4.62). ' Affin IB Research, Sept 8
This article appeared in The Edge Financial Daily, September 9, 2011.
Company Name: HARTALEGA HOLDINGS BHD
| Research House: AFFIN | Price Call: BUY | Target Price: 7.33 |
Rubber gloves
Maintain overweight: After four sequential quarters of earnings decline, rubber glove manufacturers posted their first quarter-on-quarter (q-o-q) growth in 2QCY11. Aggregate core net profit for Top Glove Corp Bhd, Supermax Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Sdn Bhd grew by 2.2% q-o-q, on the back of a 7.9% q-o-q increase in revenue.
Hartalega reported another strong quarter ' core net profit grew by 4.5% q-o-q, attributed primarily to higher sales volume (9.3% q-o-q) and higher average selling prices (7.4% q-o-q). Excluding Hartalega, aggregate earnings of natural rubber glove manufacturers grew, albeit by a marginal 0.6% q-o-q.
The 2QCY11 results for natural rubber glove manufacturers were largely characterised by: (i) lower latex prices. Average latex prices slid by 4.3% q-o-q in 2QCY11, easing cost pressure; (ii) improvement in earnings before interest and tax (Ebit) margins. Top Glove's Ebit margin remained steady at 6.4% (1QCY11: 6.4%), while Supermax added 0.4 percentage points to 8% (1QCY11: 7.6%); and (iii) lower than usual utilisation rates, specifically for Kossan and Supermax, due to the closure of certain plants for upgrading and refurbishment. Utilisation rates should gradually revert back to normal by 4QCY11.
As our earnings forecasts were up to 24% below consensus prior to the August 2011 reporting season, results were largely within our expectations though below consensus. Kossan, however, was below our expectation due to lower than expected utilisation rate. We made no changes to our earnings forecasts for Top Glove and Hartalega.
For Kossan, taking into account the lower utilisation rate and lower than expected 2QCY11 results, our FY11 to FY13 net earnings forecasts were cut by between 5% and 14%.
We make no change to our FY11 core net profit forecast of RM110 million for Supermax. After factoring in the delay of Glove City to FY14 and the addition of two new plants between FY12/FY13, our FY12/FY13 net earnings forecasts were lowered by 7% to 9%.
With signs of recovery finally emerging, we maintain our 'overweight' stance on the sector. We expect glove manufacturers' sequential earnings to improve on the back of: (i) lower and less volatile latex prices; (ii) higher utilisation rates as well as increased production as additional capacity expansion comes onstream in 4QCY11, and; (iii) continued steady demand growth.
Hartalega ('buy', target price: RM7.33) is our top pick for the sector, for: (i) its high Ebit margin of above 30%; (ii) insulation from volatile latex prices, and; (iii) consistent earnings delivery and strong operational efficiency. We also maintain our 'buy' recommendations for Supermax (TP: RM4.36) and Kossan (TP: RM4.18) on attractive valuations. Top Glove remains a 'reduce' (TP: RM4.62). ' Affin IB Research, Sept 8
This article appeared in The Edge Financial Daily, September 9, 2011.
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