Kenanga Research raises Hartalega to ‘Market Perform’


Kenanga Research has upgraded Hartalega Holdings Bhd to a ‘Market Perform’ on its positive third-quarter financial results.

The target price on the stock remained unchanged at RM5.15. Hartalega was tagged with an ‘Underperform’ call prior to the financial results announcement on Tuesday.

Kenanga noted that Hartalega’s profit after tax and minority interest of RM364.8 million for the cumulative nine months ended Dec 31, 2018, came in within, but below its consensus expectations, of the fullyear forecast.

“Intensified competition in the nitrile gloves segment, coupled with incoming supply, could potentially pressure average selling prices (ASPs) and scupper earnings in subsequent quarters.

“Following share price retracement by 28% from its peak last year, we upgrade our call from ‘Underperform’ to ‘Market Perform’,” it said.

Hartalega closed one sen or 0.18% lower at RM5.44 yesterday, representing a market capitalisation of RM18.13 billion.

Kenanga added that lower than expected volume sales and slower commissioning of Hartalega’s new production lines could pose risks to its recommendation.

The research house stated that signals — namely, normalising demand and intensified competition — are pointing towards a potential slower set of results in subsequent quarters.

It added that anecdotal evidence suggests shorter delivery lead time does indicate that strong demand is tapering off and players ramping up production could result in further ASP pressure.

From the firm’s channel checks, it gathered that competition in the nitrile gloves segment has intensified, leading to pressures on ASPs.

Hartalega’s Plant 5 of the Next Generation Integrated Glove Manufacturing Complex facility has commissioned six out of 12 lines with the remaining production lines to come on progressively by the end of the first half of 2019 (1H19).

Construction of Plant 6 structure has started, with the supporting facilities to follow in 2H19.

Plant 5 and Plant 6 will each have annual installed capacity of 4.7 billion pieces.

Additionally, construction of Plant 7 is expected to begin in May 2019 — which will focus on small orders, as well as specialty products with an annual installed capacity of 2.6 billion pieces.

Kenanga expects contribution from Plant 5 to drive FY19 earnings growth.

“Once completed, Plant 5 is expected to boost additional capacity by 14.5% to 37.2 billion pieces per annum.

“All in, Plant 5, 6 and 7 will add a total capacity of 12.1 billion pieces, raising installed capacity by 27% to 44.6 billion pieces per annum,” it added.