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Wednesday, May 8, 2019

Hartalega Holdings Berhad - Profit Margin Compression to Persist in the Near Term

INVESTMENT HIGHLIGHTS
  • 4QFY19 earnings dropped on a quarter-over-quarter basis
  • Net profit margin compression due to decline in ASP and higher operating costs incurred
  • Declared interim dividend of 1.9sen per share, leading to total dividend of 6.3sen
  • Maintain NEUTRAL with revised TP of RM4.65

Lagged our expectation. Hartalega Holdings Berhad (Hartalega)’s 4QFY19 earnings came in at RM91.4m. This bring its full year FY19 earnings to RM456.2m which lagged ours but met consensus expectations, representing 90.0% and 96.2% of full year FY19 earnings forecasts respectively. On a sequential basis, 4QFY19 revenue declined by -5.5%qoq, whilst earnings eased by -23.7%qoq.

Facing margin compression. As a result of a declining revenue and increasing operating expenses (+0.3%qoq), net profit margin dropped to 6.1% during the quarter. This is the lowest net profit margin recorded for the past five years. The compression in net profit margin happened as the group was unable to pass on the costs of: (i) abrupt strengthening of the Ringgit during the quarter; (ii) higher labour cost due to the increase in minimum wage and; (iv) higher utility cost caused by the increase in natural gas tariff earlier this year. Moving forward, we expect that the average selling price (ASP) will remain subdued in the near-term due to the current intense capacity expansion among glove manufacturers.

Managing NGC capacity expansion. Hartalega has commissioned 10 lines of 12 lines at Plant 5. Meanwhile, the construction of Plant 6 is expected to complete by the end of the year. Plant 7’s construction has been rescheduled to a later date instead of May 2019. These three plants will add +7.3b pieces to the group’s annual capacity. The industry capacity growth is currently ahead of demand growth due to ongoing commissioning of new capacity within the industry. However, we believe that the new capacity will gradually be taken up in the coming quarters as industry players regulate expansion and market demand for rubber gloves continues to grow globally.

Interim dividend declared. A third interim dividend of 1.9sen (vs 2.0sen per ordinary share for FY19) was also declared for the quarter under review which brings the total dividend declared to date to 6.3sen.

Source: MIDF Research - 8 May 2019

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