HARTA (5168) - Hartalega Holdings - Higher expenses ahead
Target RM8.23 (Stock Rating: HOLD)
From our recent meeting with Hartalega’s management, we felt that the operating environment in the next two years will be tougher due to increasing competition. To protect market share, the group aims to complete its new NGC two years earlier, which will raise capex/year. To fund the accelerated expansion, Hartalega will draw down some of its credit facilities. The higher interest expense and depreciation cost are expected to weigh on its bottomline in the near term. We cut FY15-16 EPS to factor in mainly (i) stronger US$ against RM (ii) higher interest expense and (iii) higher depreciation cost. This reduces our target price which is based on 2-year historical P/E of 21x CY16. We downgrade the stock to Hold. We prefer Kossan.
What Happened
During our meeting recently, we gather that (i) The group is on track to complete its first two new plants in NGC by 1QCY16 and most of the capacity is gradually been taken up. (ii) It is converting its Plant One to warehouse and will be decommissioning Plant Two in the near future as the lines are old and inefficient. (iii) It is also expanding into specialty glove manufacturing which commands higher margins. (iv) It expanded its OBM business into China and India to tap into the growing markets although margins are low. (v) ASP is likely to continue to decline due to increasing competition. (vi) It is likely to incur the bulk of the ESOS expense in FY16 for its proposed ESOS programme.
What We Think
We think that Hartalega is unlikely to achieve our previous earnings forecast due to the (i) delay of the commencement of its new production lines; (ii) competitive environment and (iii) higher capex and borrowings to fund its accelerated expansion plan. Management is of the view that ASP is likely to drop by 2-3% more while FY16 and FY17 net profit margin could come in at between 18% to 20% respectively, which concurs with our view that margin pressure is inevitable given its premium pricing. Aside from competition, its expansion into natural rubber gloves segment and emerging countries will also weigh on its margins. Fortunately, Hartalega has huge room to sustain the margin despite pressure given its superior margin as compared to its peers. Stronger US$ against RM will also help to buffer the impact of pricing pressure.
What You Should Do
Investors should stay on the sidelines. The share price has appreciated by 17% since our upgrade on 23 Jan 2015 and we believe the current share price has factored in the strong earnings growth in FY16.
Source: CIMB Daybreak - 06 April 2015
Target RM8.23 (Stock Rating: HOLD)
From our recent meeting with Hartalega’s management, we felt that the operating environment in the next two years will be tougher due to increasing competition. To protect market share, the group aims to complete its new NGC two years earlier, which will raise capex/year. To fund the accelerated expansion, Hartalega will draw down some of its credit facilities. The higher interest expense and depreciation cost are expected to weigh on its bottomline in the near term. We cut FY15-16 EPS to factor in mainly (i) stronger US$ against RM (ii) higher interest expense and (iii) higher depreciation cost. This reduces our target price which is based on 2-year historical P/E of 21x CY16. We downgrade the stock to Hold. We prefer Kossan.
What Happened
During our meeting recently, we gather that (i) The group is on track to complete its first two new plants in NGC by 1QCY16 and most of the capacity is gradually been taken up. (ii) It is converting its Plant One to warehouse and will be decommissioning Plant Two in the near future as the lines are old and inefficient. (iii) It is also expanding into specialty glove manufacturing which commands higher margins. (iv) It expanded its OBM business into China and India to tap into the growing markets although margins are low. (v) ASP is likely to continue to decline due to increasing competition. (vi) It is likely to incur the bulk of the ESOS expense in FY16 for its proposed ESOS programme.
What We Think
We think that Hartalega is unlikely to achieve our previous earnings forecast due to the (i) delay of the commencement of its new production lines; (ii) competitive environment and (iii) higher capex and borrowings to fund its accelerated expansion plan. Management is of the view that ASP is likely to drop by 2-3% more while FY16 and FY17 net profit margin could come in at between 18% to 20% respectively, which concurs with our view that margin pressure is inevitable given its premium pricing. Aside from competition, its expansion into natural rubber gloves segment and emerging countries will also weigh on its margins. Fortunately, Hartalega has huge room to sustain the margin despite pressure given its superior margin as compared to its peers. Stronger US$ against RM will also help to buffer the impact of pricing pressure.
What You Should Do
Investors should stay on the sidelines. The share price has appreciated by 17% since our upgrade on 23 Jan 2015 and we believe the current share price has factored in the strong earnings growth in FY16.
Source: CIMB Daybreak - 06 April 2015
