HARTA (5168) : Hartalega Holdings - Impacted by high operating cost
Target RM7.04 (Stock Rating: HOLD)
Hartalega’s 1HFY3/15 core earnings were below our (45.4% of our FY15 forecast) and consensus expectations (44%). Revenue was flat yoy due to lower selling prices, while the drop in net profit was due to higher operating costs. Given the earnings miss, we cut our FY15-17 EPS forecast by 5-11%. However, our target price (pegged at 17.7x, unchanged 10% premium to the target market P/E of 16.3x) goes up as we roll over our valuation to CY16. Maintain Hold. It declared an interim 3 sen DPS, lower than our expectation which we believe was due to the weaker earnings outlook. We prefer Kossan.
1H earnings down yoy due to high operating costs
Despite the higher sales volume (+8% yoy), Hartalega’s 1H revenue growth was flat (-0.8% yoy) due to lower selling prices that declined in tandem with raw material prices. Core net profit dropped 19% yoy due to increases in electricity and natural gas tariffs as well as maintenance costs, which could indicate that the company has been unable to fully pass on the higher operating costs to its customers. It was also impacted by the high start-up cost of NGC and investments in branding. As a result of this, its EBITDA margin dropped 4.9% pts yoy. As the company penetrates further into the markets of developing countries, its natural rubber gloves sales contribution has continued to increase, from 7.9% in 1HFY14 to 8.3% in 1HFY15. This, we believe, has also contributed to the decline in its margins as natural rubber gloves, especially in the emerging markets, command lower margins.
Qoq impacted by the same reason
On a qoq basis, revenue declined slightly by 1.4% on lower selling prices while core net profit declined 10.6% due to increases in nitrile prices, natural gas costs and pre-operating expenses for its new NGC plant. The higher realised forex loss of RM3.8m (versus RM1.1m loss in the previous quarter) and effective tax rate also caused the larger decline in net profit.
New production lines to be up and running by year end
Hartalega started the construction of its new plants 1 and 2 in 4Q13 and the company is targeting to complete these two plants by 4Q15, a slight delay from the initial target. It is also aiming to commission its first two production lines of NGC by 4Q14. We foresee more costs for its new NGC plant in the next two quarters.
Source: CIMB Daybreak - 19 November 2014
Target RM7.04 (Stock Rating: HOLD)
Hartalega’s 1HFY3/15 core earnings were below our (45.4% of our FY15 forecast) and consensus expectations (44%). Revenue was flat yoy due to lower selling prices, while the drop in net profit was due to higher operating costs. Given the earnings miss, we cut our FY15-17 EPS forecast by 5-11%. However, our target price (pegged at 17.7x, unchanged 10% premium to the target market P/E of 16.3x) goes up as we roll over our valuation to CY16. Maintain Hold. It declared an interim 3 sen DPS, lower than our expectation which we believe was due to the weaker earnings outlook. We prefer Kossan.
1H earnings down yoy due to high operating costs
Despite the higher sales volume (+8% yoy), Hartalega’s 1H revenue growth was flat (-0.8% yoy) due to lower selling prices that declined in tandem with raw material prices. Core net profit dropped 19% yoy due to increases in electricity and natural gas tariffs as well as maintenance costs, which could indicate that the company has been unable to fully pass on the higher operating costs to its customers. It was also impacted by the high start-up cost of NGC and investments in branding. As a result of this, its EBITDA margin dropped 4.9% pts yoy. As the company penetrates further into the markets of developing countries, its natural rubber gloves sales contribution has continued to increase, from 7.9% in 1HFY14 to 8.3% in 1HFY15. This, we believe, has also contributed to the decline in its margins as natural rubber gloves, especially in the emerging markets, command lower margins.
Qoq impacted by the same reason
On a qoq basis, revenue declined slightly by 1.4% on lower selling prices while core net profit declined 10.6% due to increases in nitrile prices, natural gas costs and pre-operating expenses for its new NGC plant. The higher realised forex loss of RM3.8m (versus RM1.1m loss in the previous quarter) and effective tax rate also caused the larger decline in net profit.
New production lines to be up and running by year end
Hartalega started the construction of its new plants 1 and 2 in 4Q13 and the company is targeting to complete these two plants by 4Q15, a slight delay from the initial target. It is also aiming to commission its first two production lines of NGC by 4Q14. We foresee more costs for its new NGC plant in the next two quarters.
Source: CIMB Daybreak - 19 November 2014
