Stiffer competition sparks sell down in Hartalega shares

KUALA LUMPUR: CIMB Equities Research attributes the recent sell-down of Hartalega shares to keener competition in the nitrile glove segment.

It said on Wednesday it estimates the impact of a stronger ringgit to the US dollar as well as gas and minimum wage hikes to be minimal, given the recent decline in nitrile butadiene prices.

“Maintain Hold. We lower our price-to-earnings (P/E) multiple from 36.5 times to 28.2 times to account for potential weaknesses in its near-term earnings. Our revised TP is RM5.58,” it said. Its previous TP was RM6.78.

CIMB Research said its recent meeting with Hartalega suggests that it expects intensified pricing competition in the near term, especially in the nitrile glove segment.

This is on the back of the sector’s increased nitrile glove production capacity, which is likely to impact Hartalega the most as it is the world’s largest nitrile glove producer.

“We estimate that the sector’s capacity will rise by 17.8% in 2019F vs. 13.1% in 2018, albeit on a gradual basis throughout the year,” said the research house.

CIMB Research was not overly concerned about the recent strengthening of the ringgit vs. US$ and various cost hikes in 2019 (0.7% higher gas cost and 10% minimum wage hike).

It believes this will have negligible impact on profit margins as this should be offset by the recent decline in nitrile butadiene prices (-13% on-quarter in 4QCY18) and ongoing cost efficiency efforts.

However, Hartalega has indicated that it is not discounting the fact that it may have to lower selling prices (ASPs) in the event of further intensified competition.

“We keep our Hold call on Hartalega with a lower TP of RM5.58. This is based on 28.2 timesP/E multiple (in line with its five-year historical) from 36.5 times previously, to reflect keener competition in the glove sector and lack of re-rating catalysts to drive valuations higher.

“Nevertheless, we still like Hartalega’s robust long-term structural story and recommend investors to accumulate the stock in the event of further sell-down beyond current share price levels. Downside/upside risk: stronger/weaker-than-expected pricing competition,” it said.

Source: TheStar