Nitrile glove maker Hartalega set for bumper year

NITRILE glove manufacturer Hartalega Holdings Bhd is set for a bumper year amid higher volume sales and average selling prices as well as longer delivery lead times amid the Covid-19 pandemic.

The Malaysian Rubber Glove Manufacturers Association has forecast a 20% demand growth to 230 billion pieces in 2020. Malaysia accounts for 65% of the global supply.

“Longer delivery lead times are indicating that demand will outstrip supply at least over the medium term,” Kenanga Research analyst Raymond Choo Ping Khoon said.

Delivery lead times have risen to an average of 80 to 100 days, up from 40 to 50 days normally.

“Signs of demand outstripping supply could potentially lead to higher average selling prices (ASPs) coupled with incremental cost and higher operating expenses. Looking at the stable raw material prices, ceteris paribus, hikes in ASPs are expected to lead to margin expansion,” Choo said in his research report.

He said it is understood that industry players generally have raised prices by 3-5%.

Elaborating further, Choo said Hartalega’s first four lines of Plant 6 (installed capacity of 4.7 billion pieces) have commenced commercial operations and the remaining eight lines are expected to be gradually ramped up.

Plant 7 is expected to be commissioned by early 2021, and will focus on small orders as well as specialty products with an installed capacity of 3.4 billion pieces. All in, Plants 5, 6 and 7 will add a total capacity of 12.1 billion pieces, raising installed capacity to 43.7 billion pieces per annum, he said.

Taking the cue from its third quarter ended Dec 31, 2019 that recorded a net profit of RM121 mil, due to the shorter working month in February and only partial commercial production from two lines in Plant 6, “we forecast its fourth quarter (ended March 31, 2020) core PATAMI (profit after tax and minority interest) to be between RM123 mil and RM125 mil.”

This, Choo said, “would bring the full-year estimation of PATAMI to between RM442 mil and RM444 mil or 91-98% of our/consensus forecasts which is below our expectations.”

Year to date, the stock is up 40%, and looking at the previous upcycle when the stock rose 200%, potential further upside is indicated, said Choo.

Kenanga Research, he said, has switched Hartalega’s valuation to calendar year from financial year.

The target price is now raised to RM9.30 from RM8.00 based on 49.5x calendar year 2021 estimated earnings per share, from 48x previously. — April 17, 2020, Bernama

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