Hartalega’s additional capacity is expected to fill in the higher demand of gloves by emerging markets and heightened hygiene awareness since the pandemic. — AFP photo
KUCHING: Analysts are raising their expectations for Hartalega Holdings Bhd (Hartalega) following the release of its first quarter of financial year 2021 (1QFY21) results.
To note, Hartalega’s 1QFY21 core net profit came in at RM224.8 million, accounted for 17 per cent of consensus’ full-year earnings estimates.
The research team at MIDF Amanah Investment Bank Bhd (MIDF Research) deemed this to be in line as earnings are expected to improve in the subsequent quarters on the back of rising demand and average selling prices (ASPs).
“ASP may increase by double-digit percentage in the coming quarters. Due to the unrelentingly high demand for gloves, ASPs may increase at a faster pace in the upcoming quarters compared to what had been recorded in 1QFY21,” it said in its review yesterday.
Notably, Hartalega’s spot orders, arising from new capacity built, is expected to make up less than 10 per cent of sales volume. Allocation for spot order is taken up until March 2021.
“We opine that demand is likely to supersede supply due to the higher number of daily new cases in July at about 200,000 to 300,000 per day as compared to around 100,000 daily cases in April and May,” it continued “Premised on that, we believe that prices for gloves are likely to increase further.”
Meanwhile, Hartalega’s production capacity expansion going well. Eight out of the 12 lines planned for Plant 6 has been commissioned since early of the year while the first line of Plant 7 is slated to start towards end of the calendar year.
On this, its high capacity lines in Plant 6 and 7 are expected to be completed by March 2021. With the additional capacity, production is estimated to increase to 42 billion pieces per year from the existing 37 billion pieces.
“The additional capacity is expected to fill in the higher demand of gloves by emerging markets and heightened hygiene awareness since the pandemic,” MIDF Research said.
“Earnings forecast revised higher due in view of favourable pricing and raw material cost. We expect the rise in ASPs to outpace any potential uptick in raw material costs while opex is expected to remain stable and under control especially with the cost optimisation initiatives taken.
“Due to the much better economies of scale and efficiency, as well as raw material prices that remain low, we are assuming better profitability. This is also backed by management’s continual efforts in controlling cost.”
AmInvestment Bank Bhd (AmInvestment Bank) also believed that glove demand will continue to outstrip supply for the next few years with a structural step-up in demand where glove demand is expected to grow 12 to 15 per cent per annum.
“Hartalega highlighted that the allocation for nitrile rubber from its suppliers has not reduced, and the group is confident that it will be able to procure ample material for its production lines, including the upcoming lines in Plant 6 and Plant 7.
“The group also noted that its lines are interchangeable and can produce either nitrile-based rubber gloves or natural rubber gloves.”
Additionally, Hartalega has taken preemptive measures with regards to its recruitment policy, and is working on a remediation plan for the recruitment costs incurred by its workers. This is pursuant to the zero-recruitment policy, which commenced in April 2019. The group expects to spend roughly RM45 million for this exercise.