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Asia300

Hartalega's earnings poised to strengthen after third quarter net profit falls

KUALA LUMPUR (NewsRise) - Malaysian synthetic glove maker Hartalega Holdings reported a weaker-than-expected fiscal third-quarter net profit, but analysts estimate its earnings to rebound in the subsequent quarter buoyed by higher selling price and more output.

Net profit for the three months ended December 31 totalled 66.23 million ringgit ($14.88 million), a 9.0% decline from 72.79 million ringgit a year ago, due to foreign exchange losses, Hartalega said in a statement. Quarterly revenue rose 14.64% year-on-year to 456.29 million ringgit tracking robust demand, it added.

"We expect the recent quarterly earnings shortfall to be offset by a stronger net profit" in the fiscal fourth-quarter from higher average selling prices and a "partial reversal" of foreign exchange loss on its U.S. dollar borrowings, said UOB Kay Hian's analyst Lester Chin.

The Malaysian ringgit has gained nearly 1.0% against U.S. dollar so far this year after tumbling over 4.0% last year. A stronger ringgit hurts Hartalega's bottom line as the company exports most of its products priced in the U.S. dollar.

Costs of synthetic latex, Hartalega's main raw material, have also risen some 30% along with cost of natural latex, and the company said it is reviewing selling prices as "the trend has remained unabated."

Every 1% increase in nitrile cost could reduce Hartalega's net profit by 1.5% this fiscal year, while every 1% gain in the U.S. dollar against the ringgit could boost the company's net profit by about 3.0%, according to UOB's Chin's estimates.

Still, Hartalega's strong sales reflect a rising global demand for nitrile gloves, a synthetic alternative to natural rubber gloves that may cause allergy to some. Hartalega's closest rival Top Glove Corp has also increased production of nitrile gloves to meet rising orders.

To cater to higher demand, Hartalega is currently in the midst of spending 2.26 billion ringgit to build six manufacturing facilities that is projected to lift its annual capacity to 42 billion pieces. The eight-year Next Generation Complex project, which began in 2013, has completed construction of the first two plants.

"Demand for nitrile gloves is expected to outpace latex gloves in the coming years," said AllianceDBS' research analyst Siti Ruzanna Mohd Faruk. "We believe Hartalega has the ability to sell any additional output coming from the NGC, leading to lower earnings risk."

For its first nine months, net profit slipped 1.2% to 193.6 million ringgit from 195.9 million ringgit in the preceding year's corresponding period. Cumulative revenue however surged 18% to 1.30 billion ringgit compared to 1.1 billion ringgit over the same period last year.

Hartalega will likely end the current fiscal year with 272.2 million ringgit in net profit, forecasts Affin Hwang Investment Bank's analyst Aaron Kee.

"All things considered, we expect Hartalega to resume its earnings growth trajectory" in the financial year ending March 31, 2018 with 361.6 million ringgit in projected net profit driven by volume expansion and revisions to average selling prices to offset the higher raw material cost, he added.

Shares of Hartalega rose 0.2% to 4.76 ringgit in Kuala Lumpur trading while the benchmark FTSE Bursa Malaysia KLCI was flat.

--Jason Ng

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