Hartalega Holdings - Hart to heart talk

Date: 
2013-04-05
Firm: 
CIMB
Stock: 
HARTA
Price Target: 
5.69
Price Call: 
BUY
Last Price: 
4.03
Upside/Downside: 
+1.66 (41.19%)

Target RM5.69 (Long Term: Out Perform)

We left our meeting with Hartalega positively surprised that demand for nitrile gloves remains strong with over-capacity a non-issue. Utilisation rates remain above 90% and capacity is oversold up till Jun. Also, lower ASPs are not a sign of undercutting but lower input prices. Hartalega remains an Outperform and our top pick, with catalysts from demand and the start of NGC. Our target price falls after we cut FY13-15 core EPS by 1-10% as we were too optimistic on margins. While EPS is lower, we raise our target basis to 15.57x CY14 P/E (from 14.15x) as we apply a 10% premium to Top Glove instead of zero. We believe Hartalega deserves a premium due to higher returns, margins and growth.


Hartalega remains an Outperform and our top pick, with catalysts from demand and the start of NGC. Our target price falls after we cut FY13-15 core EPS by 1-10% as we were too optimistic on margins. While EPS is lower, we raise our target basis to 15.57x CY14 P/E (from 14.15x) as we apply a 10% premium to Top Glove instead of zero. We believe Hartalega deserves a premium due to higher returns, margins and growth.

Kuan brothers confident
We met Managing Director Kuan Mun Leong and Executive Director Kuan Mun Keng recently to discuss Hartalega's prospects and the outlook of the glove industry. We left the meeting positively surprised at management's confidence on demand and assurance that fears of over-capacity have been exaggerated.

ASP trend misunderstood
While selling prices have fallen 9% in the past 12 months, we believe the decline was due to cheaper raw materials rather than excess capacity. Over the same period, nitrile raw-material prices were down 24%.

 Also, Hartalega sets its glove prices at cost-plus that adjusts for changes in costs, demand and forex twice a month. Hence the decline in ASP.

Gas supply is certain
Although news reports suggest that negotiations over a new gas contract with Gas Malaysia have been delayed, we are confident that an agreement will be signed eventually. Gas Malaysia is the sole supplier of natural gas in Malaysia and there is no viable substitute for natural gas as a primary fuel. As a result, while glovemakers are not happy with the current proposal, we believe they will eventually reach an agreement.

EPS adjustments
We cut FY13-15 core EPS by 1-10% as we were too optimistic on Hartalega's margins. Our lower estimates are mainly influenced by lower long-run selling prices, which should be 11.9% lower at 9.5sen per glove from 10.8sen previously. As a result, our EBITDA margins fall by 3.1-4.2% pts to 31.6-33.3% and our net margins, by 2.1-3.4% pts to 21.6-22.6%.

Discussions
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micheal42

Told you so.

2013-04-08 11:51

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