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StockStalk  |  JANUARY 18, 2016 6:51AM

Hartalega: Are prices overstretched?

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StockStalk instory imageRiding on ongoing positive sentiment, glove counters have been among the most actively traded ones on the local bourse. However, despite solid growth prospects, Hartalega seems to be lacking momentum to go past its current price level, whereas analysts even suggest that prices may well have been overstretched.

Business model: Founded in 1988 as a single-line operation, Bursa-listed Hartalega Holdings Bhd is today one of the four Malaysian companies dominating the market for medical gloves worldwide.

The group specialises in the manufacturing of nitrile gloves, a type of synthetic, latex-free glove typically for medical use, after being the first to invent lightweight nitrile glove in 2002, and subsequently capturing the demand shift from latex to nitrile gloves.

Amid both the industry’s and the group’s expansion in capacity, Hartalega is seeing its average plant utilisation hovering about 85%. Being the world’s largest synthetic rubber glove maker, it exports to 39 countries worldwide.

Its new plant 1 and 2 at its new site – the Next Generation Integrated Glove Manufacturing Complex (NGC) – in Sepang will achieve full commercialisation in February 2016, boosting its total capacity to 22 billion pieces annually, a 54% increase from 2014.

The NGC features six high-tech manufacturing plants (plants 1 to 6) designed to house a capacity of 28.5 billion gloves per annum and production will be centred on nitrile gloves. Upon completion by 2020, the group’s capacity is expected to enlarge to 42.5 billion gloves per annum.

The group produces 95% nitrile gloves and 5% latex gloves.

In the first half of financial year 2016 (1H16), Hartalega registered double-digit top and bottom line growth of 26.2% year-on-year and 16.9% y-o-y respectively.

Shareholders and management: The Big Four glove manufacturers in Malaysia are all family-run companies and Hartalega is no different. According to Bursa Malaysia, the biggest portion of Hartalega shares, totaling 49.65%, is held by Kuan Kam Hon, aged 68, who is the founder and executive chairman of the company.

Coming up second is the Employees Provident Fund (EPF), which has a block of shares at 7.33%. Other substantial shareholders include Budi Tenggara Sdn Bhd (3.04%), Excel Harvest Venture Ltd (2.73%) and BNP Paribas (2.41%).

Management of the company is helmed by Kuan Mun Leong, aged 38, who has been the group’s managing director since 2012.

Having graduated with a Bachelor’s degree in Mechanical Engineering from Monash University in 1999, he first joined the company’s engineering department in 2001 and swiftly moved up the ranks to be appointed as executive director of the group in 2007.

hartalega 1 yr price chart 18012016Share performance: According to Bloomberg, Hartalega has been trading in a 52-week range of RM3.50 to RM6.15. The group has a market capitalisation of RM9.81 billion as of Jan 15.

It has a one-year return rate of 73.32%, outperforming the FBM KLCI which has a one-year return rate of -4.63%. Meanwhile, competitors including Top Glove has a one-year return rate of 189.8%, Kossan (69.01%), and Supermax (83.67%).

According to Reuters, the group has a beta coefficient of 0.42, and is therefore trading below market volatility. A value of 1 reflects the average volatility of the stock market.

On Jan 15, Hartalega closed 2 sen lower at RM5.98.

What analysts think: According to Reuters, 15 analysts follow Hartalega and among them, the majority has a “hold” call. Two have an “outperform” call, two have an “underperform” call and one other has a “sell” call.

Analysts tracked by KINIBIZ also seem to share the view that prices are overstretched at current levels, albeit with differing calls.

Earnings forecast:

hartalega earnings forecast 18012016

Peer comparison: 

hartalega peer comparison 180116

StockStalk: Despite the group’s solid fundamentals and earnings prospects, TA Research adopted the view that Hartalega’s valuations appear to be stretched for the time being.

“The stock is trading at a forward price-earnings (PE) of 28.8 times, which is 1.7 times above its five-year historical mean. It is also well above the industry PE of 22.8 times and Kossan’s 22.9 times, which we deem as a fair comparable in terms of returns on equity and earnings per share growth,” said TA Research in its note published on Jan 14.

At writing time, Top Glove has a PE of 23.44, whereas Supermax has a PE of 20.87. This effectively makes Hartalega the most richly valued glove stock relative to its peers.

TA Research therefore maintained its “sell” call, albeit with an increased target price of RM5.25 per share, up from RM4.80 per share previously.

Maybank IB Research, while maintaining its “hold” call, also agreed that future growth prospects have already been priced in at current PE. The research house also suggested that the benefits of a weaker ringgit enjoyed by Hartalega is limited.

“While US dollar/ringgit appreciated 7% quarter-on-quarter and 27% y-o-y in 3Q16, we think the margin expansion will be less prominent for Hartalega compared to its latex-skewed peers,” added Maybank IB Research.

The reasons cited include a higher US dollar-denominated cost with imported rubber accounting for about 37% of total cost, speedier cost pass-through for nitrile gloves given competitive landscape, and due to locked in forex for 10 months for one of its key customers.

According to TA Research, re-rating catalysts to watch out for include the progressive commissioning of new capacity at NGC in Sepang, improved overall efficiency, and tax savings from increased exports and capital expenditures.

That said, investors may want to put their money in other glove stocks while re-rating catalysts present themselves for Hartalega.

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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.

 



 
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