This article first appeared in The Edge Financial Daily, on June 13, 2016.

Hartalega Holdings Bhd
(June 10, RM4.10)
Maintain hold with a lower fair value of RM4.05: We revise downwards our earnings estimates and target price-earnings ratio (PER) (from 27 times to 24 times) to reflect an increasingly challenging operating environment for Hartalega Holdings Bhd. We reduce our earnings before interest, taxes, depreciation and amortisation (Ebitda) margin assumptions for the next three years by three to five percentage points to 24% to 25%. This translates into a 16% cut in our financial year ending March 31, 2017 forecast (FY17F) and FY18F earnings. 

Hartalega’s Ebitda margin was double that of its peers — 32% versus 16% — but the gap has narrowed to eight percentage points, following intensifying competition. The downward price pressure is also exacerbated by Hartalega’s concentrated customer base, which may impair its ability to pass on cost increases per industry norm and does not bode well with the group, given escalating costs in the second half of 2016. 

On a more positive note, management has guided for lower tax rates of 5% to 15% beginning FY18F. We assume a tax rate of 19% for FY17F, and 15% for FY18F to FY19F. 

With global glove demand still robust (8% growth per annum), we expect Hartalega’s earnings to be capacity-driven. Underpinning its three-year compound annual growth rate of 14% is a progressive ramp-up of its Next Generation Integrated Glove Manufacturing Complex lines.

Year to date, Hartalega’s share price has retraced by 32%. It is trading at a forward PER of 18 times to 24 times (-1 standard deviation of its three-year mean). Our revised dividend per share forecasts, based on a 55% payout ratio, translate into yields of 2.5%. — AmInvestment Bank, June 10