Pricing pressure to hit Hartalega’s profit


KENANGA Investment Bank Bhd has maintained its ‘Market Perform’ recommendation on Hartalega Holdings Bhd, but downgraded its target price from RM5.15 to RM4.85, considering the lower than expected average selling prices (ASPs).

The research house also lowered Hartalega’s net profit forecast for the financial year ending March 31, 2019 (FY19), and FY20 by 2% and 5% respectively.

“From our channel checks, we gather that competition in the nitrile gloves segment has intensified, leading to pressures on ASPs.

“As such, coupled with the moderating demand and in anticipation of new capacity ramp-ups, we would not be surprised if ASPs come under further pressure over the next two quarters,” Kenanga said in a research note yesterday.

It added that delivery lead times (the time frame between order and delivery) have shortened from 60-70 days to 30-45 days, potentially indicating that strong demand is tapering off.

Kenanga said although all the negatives could have been priced in, with valuations trading at previous oversupply cycle of between mean and +1.0 standard deviation which appear undemanding, the sector lacks positive catalysts over the shortto- medium term.

The risks to the call are the higher than expected volume sales and ASPs, it said.

Hartalega’s profit for the third quarter ended Dec 31, 2018 (3QFY19) increased 5.96% year-on-year (YoY) to RM119.76 million, in tandem with higher sales recorded.

The nitrile glove manufacturer said the improvement in sales revenue was contributed by the growing demand from customers and higher ASPs in tandem with the increase in nitrile cost.

Its quarterly revenue also rose 19.94% YoY to RM723.39 million, attributed to the stronger demand for nitrile gloves and higher ASPs, coupled with a growth in sales volume of 9.6%.

The company’s earnings per share for the quarter was RM3.60, higher than RM3.43 in 3QFY18.

Hartalega MD Kuan Mun Leong (picture) said the group expects the challenging business environment to persist, given heightening competition and cost increases such as the minimum wage hike, higher natural gas tariff and additional costs associated with social compliance.

“We remain optimistic on the longterm prospects for the group. The first four plants of our Next Generation Integrated Glove Manufacturing Complex are fully operational. We have commissioned six out of 12 lines for Plant 5, with the remaining lines set to come onstream progressively.

“Meanwhile, the construction of Plant 6 is on track and construction of Plant 7 is scheduled to commence in May 2019,” he said in a statement last month.

Kuan added that the group’s efficiency will continue to improve as it embarks on building new plants, which will bet ter posit ion the company against the competitive landscape.

“At the same time, our expansion plan is cognisant of maintaining a healthy balance in supply and demand,” he said.