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Wednesday, August 24, 2016

Hartalega net profit margin set to improve

Wednesday, 24 August 2016
Hartalega net profit margin set to improve
BY TOH KAR INN

Meet the press: (From left): Hartalega executive director Kuan Mun Keng, Kuan Kam Hon, Kuan Mun Leong, and executive director Dr N. Danaraj at the press conference following the group’s AGM

KUALA LUMPUR: Hartalega Holdings Bhd’s net profit margin for the upcoming quarters is expected to improve, on the back of its cost management exercise and delayed commencement of additional production capacity.

“We are quite positive that the performance of the following quarters will be good.

“I think margins will be better than the first quarter.

“It will not be a high 20% net margin, but it will not decline (from first quarter),” said Hartalega managing director Kuan Mun Leong, after the company’s AGM.

The glove maker’s net profit margin for the first quarter ended March 30, 2016 (Q1FY17), was an estimated 14%.

In Q1FY17, Hartalega’s net profit fell by 10% to RM56.18mil due to rising costs and increased competition.

The cost increase was mainly due to the revision of natural gas prices and increase in minimum wage.

“We think talks about oversupply are unfounded, as orders for the next few months are full and we are working hard to deliver,” said Mun Leong.

Over the past four months, Hartalega has undertaken a cost management exercise which has resulted in substantial savings for thecompany.

The cost management exercise entails trimming of raw material wastage, reducing labour, as well as reviewing production line design and chemical consumption.

The reduction in workforce headcount of close to 600 people has helped to mitigate effects of the minumum wage hike and freeze on hiring foreign workers.

“Despite the natural gas tariff increase by 17%, the group’s gas cost has been quite flattish.

“The cost management exercise was effective in lowering our costs, so it is not a concern for us going forward,” he said.

Plant 3 of Hartalega’s Next Generation Integrated Glove Manufacturing Complex (NGC) is expected to commence operations in October 2016.

The company plans to progressively expand by commissing one production line per month.

Mun Leong explained that a surge of additional production capacity will cause pricing pressure.

Each plant has a production capacity of 3.8 billion pieces per annum, with 12 production lines in total.

Initially, Hartalega was supposed to kickstart its Plant 3 operations early this financial year, but later rescheduled the expansion in accordance to market demand.

To date, the group has spent RM1.3bil on NGC, from the investment sum of RM2.2bil.

Total capital expenditure (capex) allocation on expansion for FY17 ending March 20, is RM400mil.

“The market has bottomed out and I think from here on, the pricing pressure will lighten due to the annual medical glove industry growth of 8% to 8.5%.

“This has been going on for the last 15 years and we expect this growth to continue, particularly in the nitrile segment, which will grow more at the expense of the natural rubber.

“The rescheduling of additional production capacity by Hartalega and its peers has also reduced pressure on glove prices.

“Going forward, we expect things to recover and be better,” said executive chairman Kuan Kam Hon.

The board has proposed a final dividend of 2 sen per share, bringing total dividend paid out for FY16 to 8 sen per share.

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