Hartalega Holdings Bhd
(July 16, RM8.60)
Maintain neutral with a higher target price (TP) of RM9.12: We recently hosted Hartalega Holdings Bhd on a regional non-deal roadshow. Capacity expansion at its next-generation integrated glove manufacturing complex (NGC) remains on track with better-than-expected operating productivity. 

Hartalega has been commissioning two lines per month since January 2015 and management expects the 14th line to be operational by end-July. All 24 lines of Plant 1 and 2 are expected to be commissioned by December this year, bringing total capacity to 20 billion pieces (December 2014: 14 billion pieces). 

NGC has recorded a 33% jump in productivity to 2.6 workers per million gloves per month (wpmgpm), compared with the pre-NGC setup of 3.9 wpmgpm. Management is exploring ways to incorporate further automation and lean manufacturing practices to bolster productivity to two wpmgpm 

Hartalega is cautious about the outlook for the average selling price (ASP) of gloves due to increased competition, especially in the nitrile glove segment. We lower our average nitrile glove ASP assumption to US$24 (RM91.20 per 1,000 pieces) for financial year 2016 (FY16) from US$26 previously. Nevertheless, we expect the improvement in productivity to more than offset the ASP decline and boost operating margins going forward. 

After updating our assumptions on productivity and ASP, we adjust our earnings forecasts by -9% to 7% for FY16-24F. The key downside risk to our forecasts remains the execution of NGC, while the upside risk includes further weakening of the ringgit. 

Hartalega has proposed a one-for-one bonus issue which is expected to be completed sometime in September to December 2015. The corporate exercise would improve Hartalega’s trading liquidity. 

While Hartalega’s growth prospects are intact with 24% earnings per share compound annual growth rate for FY16 to FY18, we believe this has been well reflected in current price levels. The stock currently trades at 26.7 times FY16 price-earnings ratio (PER), close to its historical two standard deviation trading band of 27 times PER. 

We reiterate our “neutral” call with a revised discounted cash flow-based TP of RM9.12, implying 28 times FY16F PER. Our TP would adjust to RM4.56 post-bonus issue. — RHB Research Institute, July 16

This article first appeared in The Edge Financial Daily, on July 20, 2015.