Wednesday, 9 August 2017

Hartalega’s earnings to remain resilient in financial year of 2018

The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) opined that Hartalega’s earnings will remain resilient in FY18 as it expected new demand to come from China due to the switch from vinyl gloves to rubber gloves.
“In addition, the continuous switch in demand for powdered gloves to non-powdered gloves and nitrile gloves has allowed demand to remain resilient,” MIDF Research said.
Furthermore, the research arm opined that revenue will also continue to be supported by the slower growth in the glove industry’s capacity expansion which has provided Hartalega with a more conducive environment to price its product.
It added that this is as opposed to the intense pricing competition last year which caused the glove manufacturers to reduce prices in order to compete for orders.
From the research arm’s observation, MIDF Research noted that natural rubber price have been steadily coming down from its peak of RM8.16 per kilogram (kg) back in February.
“As of June 30, the average price of natural rubber stands at RM5.73 per kg,” it said.
Thus, MIDF Research said Hartalega would have to adjust the group’s average selling prices (ASPs) lower to accommodate for lower raw materials price.
However, despite the expected lower ASPs, the research arm opined that the new capacity from Plant 3 will assist to offset the lower ASPs going forward as demand is expected to remain resilient.
“We understand from the management that the commissioning of the production lines in its Plant 3 of the next generation integrated glove manufacturing complex (NGC) has now been fully-completed.
“It will now move on to the production lines in Plant 4 which will begin commissioning in late July,” the research arm said.
MIDF Research noted that there will be 12 production lines in Plant 4 and Hartalega expects to commission one production line per month.
The research arm further noted that management expects to complete the full-commissioning of Plant 4 by middle of 2018.
With the complete commissioning of Plant 3 of the NGC, MIDF Research opined that Hartalega’s first quarter of FY18 (1QFY18) earnings will replicate the group’s 4QFY17 earnings of about RM85 million to RM90 million.
This is due to the fact that the research arm believed that the ringgit will continue to trade at current level and revenue will continue to be driven by the 24 billion of annual glove production capacity.
“We are also expecting Hartalega to maintain its net margin in the mid-teens in FY18 premised on the abovementioned factors,” the research arm said.

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