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Nikkei Markets

Margin pressure likely to weigh on Hartalega in months ahead

Analysts cut targets post weaker-than-expected earnings; shares fall

KUALA LUMPUR (Nikkei Markets) -- Earnings and margin pressure will continue to challenge Malaysian glove maker Hartalega Holdings in the months ahead, analysts said, after a weaker-than-expected second-quarter performance prompted many to cut their stock price targets.

Hartalega shares declined as much as 4.2% on Wednesday in Kuala Lumpur trading before recouping some losses after the company reported its net profit fell nearly 14% in the three months ended Sep. 30 as average selling price fell, while cost of packaging and natural gas rose.

"Despite the challenging operating environment, market demand has improved," said Hartalega Managing Director Kuan Mun Leong. "While tough market conditions may persist, the group is positive on long-term prospects."

At least three analysts, including Maybank Investment Bank's Lee Yen Ling and UOB Kay Hian's Philip Wong, downgraded their recommendations on Hartalega to Sell. Six out of 13 analysts covering Hartalega have Sell ratings, five have Neutral or Hold calls, and two rated the stock Buy.

"Though sales volume remains robust, we note that the massive expansion by industry players will suppress the earnings recovery," said Maybank's Lee. "We believe the operating environment remains competitive with local and foreign players expanding capacity concurrently."

Net profit for the three months ended Sep. 30 totalled 103.87 million ringgit ($25.15 million) compared with 120.22 million ringgit in the same period last year, Hartalega said in exchange filing. Quarterly revenue fell 0.7% year-on-year to 709.42 million ringgit from 714.24 million ringgit.

The company also cautioned of tough times ahead due to rising operating cost. Hartalega said the company has taken "tangible steps" to mitigate potential margin pressure, including raising investment in automation to reduce manual labor.

Still, it will commission the first line of Plant 6 in the first quarter of 2020 and has started construction of its Plant 7. Once the two plants are completed, its annual capacity will increase to 44.7 billion pieces by March 2022 from the current 36.6 billion pieces, Hartalega said.

For UOB Kay Hian's Wong, Hartalega's delays in capacity addition affirm a slight lingering in the demand-supply imbalance. "Incoming latex supply could spill over to nitrile glove space" as producers may switch to producing synthetic nitrile gloves instead of natural rubber, he said.

Malaysia is home to the world's largest rubber gloves manufacturers. Apart from Hartalega, the world's largest producer Top Glove is also pushing ahead with capacity expansion plan even as analysts raised concerns of looming supply glut that could intensify competition in the market.

Top Glove has budgeted about 600 million ringgit in capital expenditure for the financial year ending Aug. 31, 2020 including cost for a potential acquisition. Last month, the company disclosed a 13% decline in net profit for the June-August quarter.

Shares of Hartalega ended 0.9% lower at 5.42 ringgit, while Top Glove declined 2.9% to 4.37 ringgit. The benchmark FTSE Bursa Malaysia KLCI closed 0.2% lower.

--Jason Ng

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