By Xavier Kong
MAYBANK IB upgraded its recommendation for Hartalega Holdings Bhd to hold, raising the target price to RM5.75 from a previous RM4.95, with an expectation of higher sales volumes being reflected in the group’s third quarter ended Dec 31, 2019.
The research house expected the net profit for 3QFY20 to be higher both quarter-on-quarter and year-on-year, based on an estimation that quarterly sales could grow 9% qoq and 14% yoy, on the back of an assumed maximum plant utilisation rate of 93% given the strong demand from the US, along with slightly better margins on lower nitrile rubber costs.
It was also noted that the demand and supply is balanced for now, with glove manufacturers able to raise average selling prices (ASPs) to pass on the higher minimum wage implemented.
“We also think it will be able to adjust its ASPs to pass on the recent weakness in the US$ against the ringgit. Based on the expansion schedule of Plants 6 and 7, we estimate that Hartalega’s effective capacity will grow moderately at 9% and 10% in FY20 to FY21E,” said Maybank IB.
It noted that the capacity expansion of the global top five in glove manufacturing accelerated towards the end of 2019, with Top Glove Corporation Bhd raising its capacity by 10% in that quarter alone.
“Top Glove’s expansion in 4Q19 also represents 2% of global glove demand. This is significant considering that global glove demand traditionally grows at 8% per annum,” noted the research house, also opining that the new supply has been absorbed by unusually strong demand, given the lack of ASP pressure despite high plant utilisation rates.
“Demand may have picked up substantially in 4Q19 due to very low inventory levels following the slower purchases in 1H19, which could have been due to the uncertainty surrounding US import tariffs on China’s gloves,” said Maybank IB.
However, the research house also believes there could be a supply overhang in 2Q20 if glove purchasers overstock in the two preceding quarters. At the same time, with the weakening US$ against the currencies of key glove producing countries, importers may also hold back purchases temporarily.
“We believe there could be ASP pressure in the medium term and that the glove players may respond by scaling back expansion,” said the research house.
At the noon close, Hartalega’s shares were last done at RM6.05, up 25 sen, with 11.5 million shares changing hands. – Jan 22, 2020
