Hartalega Holdings Bhd (Nov 8, RM5.46)
Maintain buy at RM5.41 with target price of RM6.80: Results for 2QFY12 (due yesterday evening) are likely to meet expectations with commendable operating numbers, though likely partially mitigated by some mark-to-market foreign exchange loss. We see long-term value in the stock on the nitrile glove growth story and its compelling CY12 price-earnings ratio (PER) valuation of just 8.6 times. Moreover, the stock offers a potent combination of both growth (three-year net profit compound annual growth rate of 15%) and yield (2012 net dividend yield of 5.3%). Hartalega remains our top pick in the glove sector with a target price of RM6.80.
We expect the group to post a 2QFY12 core net profit of RM54 million to RM56 million (flattish quarter-on-quarter [q-o-q], +17% year-on-year [y-o-y]; before mark-to-market forex losses), lifting 1HFY12 net profit to around RM110 million (+24% y-o-y), meeting 53% of our full-year forecast. We expect volumes to rise slightly q-o-q (by about 3% to 4%) following the retrofitting of Plant 4. Margins, however, are likely to contract q-o-q, for the group absorbed the bulk of the rise in raw material prices (natural butadiene rubber [NBR] cost: +13% q-o-q) to ensure competitive pricing.
The group has around US$73 million (RM228.5 million) worth of forex forward contracts at an exchange rate of RM3.04 to RM3.07, with the bulk expiring in March 2012 (4QFY12). As at end 2QFY12, the ringgit stood at 3.19 per dollar and has tapered off to 3.11 presently, hence the loss will only widen should the rate rise above RM3.19 in March 2012. Even with the forex loss, Hartalega’s 1HFY12 results will still be broadly in line with our forecasts and consensus.
The price of its key input, NBR, has fallen sharply by 18% month-on-month to US$1.70 per kg and is 11% cheaper than latex now. However, we do not expect significant margin improvement in the sequential quarters, for management would likely defend market share via a competitive average selling price, in view of the new capacity-led competition in the nitrile segment. Separately, sales of nitrile gloves remain strong in Europe, for they are still 10% to 20% cheaper than latex PF gloves.
We expect the group to meet our 9% y-o-y earnings growth for FY12. We also expect Hartalega to declare a first interim dividend upon the release of the results (2QFY11: four sen per share). Hartalega offers both growth and defensiveness with its net dividend yield of 5.3%. Our RM6.80 target price is based on discounted cash flow and it implies just 10.8 times CY12 PER and nine times CY13. — Maybank IB Research, Nov 8
This article appeared in The Edge Financial Daily, November 9, 2011.
Maintain buy at RM5.41 with target price of RM6.80: Results for 2QFY12 (due yesterday evening) are likely to meet expectations with commendable operating numbers, though likely partially mitigated by some mark-to-market foreign exchange loss. We see long-term value in the stock on the nitrile glove growth story and its compelling CY12 price-earnings ratio (PER) valuation of just 8.6 times. Moreover, the stock offers a potent combination of both growth (three-year net profit compound annual growth rate of 15%) and yield (2012 net dividend yield of 5.3%). Hartalega remains our top pick in the glove sector with a target price of RM6.80.
We expect the group to post a 2QFY12 core net profit of RM54 million to RM56 million (flattish quarter-on-quarter [q-o-q], +17% year-on-year [y-o-y]; before mark-to-market forex losses), lifting 1HFY12 net profit to around RM110 million (+24% y-o-y), meeting 53% of our full-year forecast. We expect volumes to rise slightly q-o-q (by about 3% to 4%) following the retrofitting of Plant 4. Margins, however, are likely to contract q-o-q, for the group absorbed the bulk of the rise in raw material prices (natural butadiene rubber [NBR] cost: +13% q-o-q) to ensure competitive pricing.
The group has around US$73 million (RM228.5 million) worth of forex forward contracts at an exchange rate of RM3.04 to RM3.07, with the bulk expiring in March 2012 (4QFY12). As at end 2QFY12, the ringgit stood at 3.19 per dollar and has tapered off to 3.11 presently, hence the loss will only widen should the rate rise above RM3.19 in March 2012. Even with the forex loss, Hartalega’s 1HFY12 results will still be broadly in line with our forecasts and consensus.
The price of its key input, NBR, has fallen sharply by 18% month-on-month to US$1.70 per kg and is 11% cheaper than latex now. However, we do not expect significant margin improvement in the sequential quarters, for management would likely defend market share via a competitive average selling price, in view of the new capacity-led competition in the nitrile segment. Separately, sales of nitrile gloves remain strong in Europe, for they are still 10% to 20% cheaper than latex PF gloves.
We expect the group to meet our 9% y-o-y earnings growth for FY12. We also expect Hartalega to declare a first interim dividend upon the release of the results (2QFY11: four sen per share). Hartalega offers both growth and defensiveness with its net dividend yield of 5.3%. Our RM6.80 target price is based on discounted cash flow and it implies just 10.8 times CY12 PER and nine times CY13. — Maybank IB Research, Nov 8
This article appeared in The Edge Financial Daily, November 9, 2011.
