Harta Q2 FY2020 Review

Harta reported a 0.7% drop in revenue to RM 709.424 mil for the second qtr from RM 714.244 mil a year ago. Net profit however dropped by 13% to RM 103.867 mil. The reduction in sales revenue was attributed to lower average selling price and higher packaging and natural gas cost have dragged PBT to close lower.

Recall that natural gas prices were revised upwards abruptly by an average of 5.3% in July and glove makers were unable to adjust their ASPs immediately given the short notice. On top of that, the fact that the orders were locked in about three months before the delivery of goods also contributed negatively to the margins.

1.80 sen of dividend declared for 1HFY2020 compared to preceding year has reduced by 18% which is in line with 19% lower of net profit achieved for the 1HFY2020 at RM 197.930 mil compared with RM 245.09 mil for the same period a year ago. (Dividend declaration is interrelated to net profit of the group)

Lower profit before tax is due to lower ASP and higher operating cost (Higher packaging & natural gas cost)

Asset and Liabilities sheet remains healthy. Inventory has slowly picking up for this quarter compared with Q1 FY20 where inventories was amounting at RM 288.072 mil; an increase of 5.2%.

Q1 FY 2020

Q2 FY 2020

From cash flow statement, the group has started to purchase more inventories. I anticipate that Harta will have more orders during year end. Hence, the management started to procure more stocks to cope for their production.

Revenue for the quarter amounted to RM 709.4 million, increased by RM 69.3 million or 10.8%. The higher sales revenue was attributed to higher sales volume for the quarter. Sales volume increased by 12.7%.
Profit before tax for the quarter increased by RM 15.7 million or 12.9% as compared with previous quarter mainly due to increase in sales volume and lower upkeep and labour cost.

Group Prospect:

In line with growing rubber glove demand globally, Hartalega will continue with its NGC capacity expansion plans. Plant 5 of NGC facility was fully commissioned during the quarter. First line of Plant 6 is expected to begin commissioning in the 1st quarter of Year 2020 and will have an annual installed capacity of 4.7 billion pieces. Plant 7 which has commenced construction will cater to small orders focusing more on specialty product and will have an annual installed capacity of 3.4 billion pieces. With the progressive commissioning of Plant 6 and 7, Hartalega’s annual installed capacity is expected to increase from current 36.6 billion to 44.7 billion pieces by FY2022.

While market demand has picked up in the second half of 2019, business environment continues to remain challenging with rising operating cost. In line with this, Hartalega will continue to embark on cost optimization to mitigate potential margin pressure. In addition, Hartalega will also intensify investment into Industry 4.0 technologies to develop automation solutions, IoT technology & AI solutions in order to reduce dependency on manual labour and enhance operation effectiveness.

Hartalega has recently launched its antimicrobial gloves in Shanghai, China. The Company will continue to market the product in other emerging markets as well as working on securing Federal Drug Administration (FDA) approval for the US market. As the new medical product is in its introductory and educational phase, we expect AMG to contribute more significantly in the coming years.

Moving forward, Hartalega remains optimistic of the longer term prospects underpinned by growing demand for rubber gloves, ongoing NGC expansion and potential growth of AMG sales.

Comment:
The recent news that the additional 15% tariff imposed by the US on Chinese-made medical gloves that came into effect on Sept 1 will increase the average selling price, if Harta can capture the demand I reckon that the Q3 FY 20 result will be much more better. Although USD has weaken against RM starting from Oct, this effect will be cushioned by lower material cost for Nitrile glove from crude oil price.

By estimating the sales will grow similar to the increase in inventories also production utilization rate to run at more than 90%. I presume a 5% increase in Q3 FY20 EPS to achieve 3.24sen from preceding quarter and another increase of 2% in Q4 FY20, contributing by the newly commission production lines in plant 6 which will calculate for 3.30sen of EPS.

Hence, overall full year forecast EPS for FY2020 I am looking at a summation of 12.44sen (5.90sen + 3.24sen (F) + 3.30sen (F)), compared to FY 2019 EPS stands at 13.72 sen. Forecast FY20 EPS will be 9.3% lower than preceding FY19 EPS.

By taking worst case scenario P/E 38 during Q4 FY19, the target price for FY 20 full year is RM4.72. Currently, the stock price has moved to RM5.25 (13/11/19) and it is over priced. Comparing to current P/E at 43, the estimated target price is  RM5.35.

Target Price = RM4.72~RM5.35

A hold call for Harta, price is still within target price, without much gap of price improvement, however I still believe in company's prospect as AMG will soon be the next game changer in glove industry.