RHB Research keeps buy call on Hartalega, TP RM6.05

KUALA LUMPUR: RHB Research is retaining its buy call on nitrile glove maker Hartalega with a target price of RM6.05 which implies a 24% upside plus 2% FY20F yield. Its last traded price was RM4.87.

It said on Friday it expects 1QFY20F earnings to improve on-quarter due to a more favourable US$/RM rate and less intense competition in the market, as glove producers delay their capacity expansion plans.

“The stock’s current valuation, at +0.1 standard deviation, is attractive after a 32% decline from its peak – while the sector’s outlook remains robust, ” it said.

Hartalega is expected to announce its 1QFY20 results in August.

RHB Research expects 1QFY20 earnings to weaken YoY, mainly due to the high base effect of 1QFY19 (exceptionally high demand for nitrile gloves, due to the shortage of vinyl glove supply in the market).

It said the sign of earnings recovery should be seen in 1QFY20 earnings with single-digit growth QoQ.

“In 1QFY20, the US$ appreciated against the ringgit by 1.2% to 4.132 by end-June. Our forex strategist also believes that post the US Federal Open Market Committee (FOMC) meeting recently, the pace of US$ decline will be extremely gradual.

“In our view, Hartalega’s current valuation presents a rare opportunity to accumulate its stock at trough levels. Its share price has weakened by 32% from its peak of MYR7.20 on Aug 28, 2018.

“Its forward P/E has declined by 17 times (or 2.4SD) from the peak of 47 times (+2.5SD) to 30 times forward P/E (+0.1SD) currently. In the previous earnings down cycle in 2016, its share price fell by 30% (18 times forward P/E and 2.4SD) from its peak, suggesting that the current share price downtrend has ended.

“We maintain our earnings estimates for FY20-22. Although 1QFY20 results should make up less than 20% of our full-year forecasts, this is within expectations. Most of the earnings recovery should only be felt from 2QFY20 onwards, as the demand-supply equilibrium has emerged, ” RHB Research said.

The research house continues to like Hartalega as it is a proxy for growing health awareness in the emerging markets.

It expects glove demand to increase 8%-10% pa on low per capita consumption in China and India, at six pieces per annum (ppa). This is much lower than developed countries’ more than 200 ppa.

Source: TheStar