HARTA (5168) : Hartalega: 17% Rebound From Year Low, What’s Next?

HARTA (5168) : Hartalega: 17% Rebound From Year Low, What’s Next? Healthcare-related stocks are back in the spotlight with the recent outbreak of the Ebola epidemic. Medical gloves are an essential part of medical protective gear in the day to day lives of healthcare workers. So while Ebola is wreaking havoc across West Africa economies, it’s business better than usual for some of the world’s largest glove makers in Malaysia. Malaysia is the world’s largest supplier of natural rubber and nitrile rubber gloves and is estimated to supply over 60 percent of the global glove demand. While there are many players in Malaysia’s glove industry, Hartalega Holdings stands out as the indisputable market leader, particularly in the nitrile glove segment. Industry And Company Background The rubber glove market can be separated into two major components – natural rubber gloves and nitrile rubber gloves. The former is produced using natural rubber while the latter is manufactured using synthetic latex rubber. While natural rubber gloves have accounted for the largest portion of the global rubber glove demand, global nitrile gloves demand has been increasing steadily in the past years, surpassing natural rubber glove in 2013 with a demand ratio of 51 percent to 49 percent, as noted by the company. The rising demand for nitrile gloves can be attributed to the rising awareness to latex allergies and the high puncture resistance property of nitrile gloves as well as increase in healthcare spending worldwide. Hartalega is a pioneer in the rubber glove industry, introducing the world’s first soft nitrile glove in 2002, starting the demand shift from latex to nitrile gloves all over the globe. Today, Hartalega prides itself as the world’s largest nitrile glove producer, with annual production capacity of 13.6 billion gloves. As of FY14 (financial year ended 31 March 2014), nitrile gloves sales account for more than 90 percent of the group’s total sales. Superior Margins As a pioneer in the nitrile glove segment, Hartalega has been able to enjoy supernormal operating margin above 27 percent in the last five years, well above the operating margins of its competitors (below 19 percent).

Source: FactSet. */^: Company's latest ended fiscal year is FY13/FY14.

According to the company, the superior margins are achieved through product innovation and quality enhancement, with the firm spearheading the automation technology in manufacturing processes since 1994.

Today, Hartalega has 55 production lines that are fully interchangeable between nitrile and natural rubber gloves production, which allows the group to cater quickly to changes in demand trends.

The firm also boasts the fastest production line speed of 45,000 pieces/hour/line in its latest Plant 6.

With increasing competition from other players who are also raising emphasis and capacity on nitrile glove production, increment in efficiency is needed for Hartalega to stay at the top of its game.

Positive Catalyst: NGC Plant
With an estimated total investment value of RM2.2 billion, Hartalega’s next generation manufacturing complex (NGC) is poised to be a growth driver for the group.

According to the firm, the mega complex will house six manufacturing plants and 72 production lines, which is expected to increase production capacity by 15 percent annually until 2020. Upon completion, the group’s production capacity will expand substantially to over 42 billion pieces per annum.

Management has stated that the first phase of the NGC will begin in November. Under phase one, 2 plants with 12 production lines will be commissioned and completed by 4Q15 (quarter ending 31 March 2015), boosting installed capacity to 22 billion by FY16.

The development of its NGC plant highlights the group’s focus on productivity. Streamlined plants and warehouses as well as automation and technologically advanced production lines installation, may help sustain the firm’s supernormal margins amidst competition.

Brokers’ Take
Hartalega reported a lower operating margin in 1H15 of 24.8 percent (1H14: 29.4 percent), mainly attributable to new head count expenses incurred for the launch of the NGC.

However, analysts anticipate that margins will pick up after phase one of NGC commences operation. Although consensuses are that FY15 could be a relatively muted year for the group, investors can look forward to possible positive contribution and improvements in margins from FY16 onwards.

Out of the nine research houses that cover the stock, two have issued a ‘Buy’ rating; five have given a ‘Hold’ rating, while two have ‘Sell’ ratings with an average target price of RM6.72, relatively in line with 21 November’s closing price of RM6.70, after rebounding some 17.1 percent from its year low in May.

Furthermore, based on data from FactSet, Hartalega is currently trading at its 5-year high trailing twelve month price to earnings of 24.2 as of 24 November, the highest amongst its peers, something which investors should also be taking into consideration.

Hartalega Price Chart, Source: FactSet

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