Affin Hwang Capital Research is maintaining its Hold call for glove maker Hartalega and raised the target price to RM8.72.
It said on Friday that after taking into account the group’s accelerated expansion plans, it raised its FY16-18E earnings by 4.3%-7.9%.
The research house raised its 12-month target price to RM8.72 from RM8.56, based on an unchanged 22 times price-to-earnings (PE) for CY16E which was one standard deviation above its three-year historical mean.
“At this juncture, we believe that Hartalega shares have priced in the group’s superior earnings growth prospects for FY16-17E.
“However, we continue to view Hartalega as a long-term play given its strong fundamentals and superior technology in the lightweight nitrile (NBR) gloves segment,” it said.
Affin Hwang Research said in view of intensifying pricing competition within the nitrile segment and Hartalega’s growing NR product mix, it believe the group’s margins are likely to continue their downward trend.
Nonetheless, the group’s aggressive expansion plans should fuel earnings growth. In addition to its original equipment manufacturer (OEM) business, Hartalega plans to focus on own-brand manufacturer (OBM) gloves in emerging markets.
“Better efficiencies to combat sharp margin compression As the market leader (in terms of nitrile market share and profit margins), we believe that Hartalega’s margins will most likely decline as the pricing premium for lightweight NBR gloves narrows with increased industry capacity.
“Furthermore, its growing exposure in the natural rubber (NR) glove segment should be a drag on margins. Nevertheless, we expect better economies of scale from its next-generation glove complex (NGC) and a favourable operating environment to help cushion any sharp margin erosion,” said the research house.
Affin Hwang Research said the first phase of its NGC already has 10 lines in place, while two of its plants (Plants 1 and 2) should be ready for full commercial production by 1QCY16 with a total of 24 production lines.
Hartalega is also looking to speed up the completion of its entire NGC project by 2020 (from 2022). We understand that the group has already started construction on Plants 3 and 4 (total of 24 lines), which are expected to be completed by July 2016.
“Hartalega is continuing to focus on emerging markets such as China and India due to the strong growth potential for gloves in these regions.
“We understand that the group will be using its own-brand manufacturer (OBM) gloves to penetrate into these markets, as Hartalega plans to grow its OBM segment. Its product mix in the NR segment is expected to grow, as these markets have a preference towards NR gloves based on lower cost,” it said. – The Star