No chain effect from Hartalega profit surge

Other glove manufacturers have already factored in the higher ASP to their earnings earlier, analyst says


HARTALEGA Holdings Bhd’s recent surge in quarterly net profit is unlikely to have a chain effect on other local glovemakers as their growth was observed earlier.

Malacca Securities Sdn Bhd head of research Loui Low attributed Hartalega’s net profit spike to the company’s delay in increasing its average selling price (ASP).

“Companies like Top Glove Corp Bhd and Supermax Corp Bhd have already factored in the higher ASP to their earnings growth percentage earlier,” Low told The Malaysian Reserve (TMR), adding that other glove manufacturers may not post growth as strong as Hartalega this quarter.

Hartalega’s quarterly earnings surged sevenfold to a record high of RM1 billion on Monday helped by an increase in sales volume and higher selling prices for its nitrile rubber gloves. Revenue for its third quarter ended Dec 31, 2020 (3Q21), grew 167.4% year-on-year to RM2.13 billion.

Low expects the effectiveness and speed of the country’s vaccine rollout will continue to impact the sentiment for gloves.

“However, the spread of Covid19 cases will still persist until 70%- 80% of the population is vaccinated, which the demand for gloves should persist.

“Even glovemakers are expecting glove demand to remain resilient over the next few quarters,” he added. Low said ASP might continue but at a milder increase.

JF Apex Securities Bhd analyst Nursuhaiza Hashim foresees the ASP trend to ease significantly going forward amid the availability of vaccines in the near term.

“Based on recent news, Malaysia is expected to receive its first phase of Pfizer Inc’s vaccine by end of February 2021, while the vaccine is widely adopted in the US and Europe, which are the major consumers and price movers of the glove demand.

“We expect the demand for gloves will ease from peak upon vaccination taking place, thus denting the positive momentum of ASP growth,” she stated in a note yesterday.

JF Apex maintained its ‘Hold’ call on Hartalega with a lower target price (TP) of RM14.70 from RM16.02 previously as it assigns a lower price-earnings ratio of 30 times for the 2021 calendar year in view of the wide adoption of Covid- 19 vaccines and incoming competition from new entrants, which could pose a threat to ASPs.

RHB Investment Bank Bhd (RHB Research) projects Hartalega’s earnings outlook to rise higher in the upcoming quarter as its ASP uptrend has remained intact.

In addition to the company’s spectacular earnings, RHB Research also commended the company for its gold standard in Covid-19 prevention among workers.

“We raise FY21-FY22F core earnings by 31% and 26% to RM3.19 billion and RM4.63 billion respectively. This is due to higher FY21- FY22F ASP assumptions of US$48 (RM194.40) and US$59 per box from US$41 and US$50 respectively.

“We maintain our FY23F core earnings as the ASP estimate of US$47 per box remains unchanged. This is conservative versus the current market price for nitrile gloves, which is at US$110-US$120/box,” RHB Research analyst Alan Lim stated in a report.

RHB Research maintained its ‘Buy’ call for Hartalega, with its TP raised to RM23.88 on the higher net profit forecast.

MIDF Amanah Investment Bank Bhd (MIDF Research) also increased its earnings forecast for Hartalega for FY21E (financial year 2021 estimate) by 49% in anticipation of further upside on ASP, which in turn will drive up revenue and profit.

MIDF Research analyst Ng Bei Shan, in a note, stated that the increase in ASP will offset higher raw material costs.

“We believe the demand for rubber gloves will remain robust in the near-to-medium term as they are part of the essential personal protection equipment for frontline workers. The increase in usage is also likely to come from emerging markets that used to consume less rubber gloves,” Ng stated.

MIDF Research maintained its ‘Buy’ call on Hartalega with a revised TP of RM18.25 from RM22.96 previously.

Read our earlier report

Hartalega’s 3QFY21 net profit surges to record high