Maybank Investment Bank Research sees more upside for nitrile glove maker Hartalega due to the fall in the prices of the key raw material and commodity prices.
It said on Thursday the price of key raw material nitrile-butadiene rubber (NBR) has fallen 9% in two months. NBR is an oil-resistant synthetic rubber produced from a copolymer of acrylonitrile and butadiene.
“This is in line with the fall in natural rubber latex (-11% in two months), owing to weaker demand and high inventory. The US$/ringgit is rising at a rapid rate (+10% in four months) and broader indicators (low crude oil price, foreign fund outflows) point to sustained weakness in the US$/ringgit into 2015,” it said.
Maybank Research said in view of the falling commodity prices, it sees further downside risk to the price of NBR, which will cushion Hartalega’s margin, in the event that nitrile glove competition heats up in 2015.
In any case, it had already factored in margin contraction from increased competition.
Hartalega is also a net beneficiary of a strong US$ in the long term as its US$-denominated sales receipts outweigh its US$-denominated costs.
“However, in the short term, the company may see some forex loss as it has locked in its US$/ringgit at lower rates. This, couple with start-up costs at its new plants, could cap its earnings in the next two quarters.
“We are turning positive on Hartalega as we look forward to its strong FY3/16-17 EPS growth of 31% and 18% respectively,” it said.
The appeal of the stock is in its: (i) defensive earnings profile (resilient global demand growth); and (ii) ability to gain market share while ensuring bottomline growth due to its cost effectiveness.
Maybank Research said its earnings forecasts are unchanged but its target price was raise to RM8.50 (from RM7) as it pegs Hartalega to its +one standard deviation mean price-to-earnings ratio of 21 times 2016 (from 19 times), as it regains its superior earnings growth.
“The healthcare sector’s PER average is currently a higher 29 times. Hartalega is our Top Pick in the sector for the next 12 months,” it said.