Harta Q4 FY20 Review

Result was slightly below my research expectation but the performance was unthinkable amidst the overwhelming news reported on the only winner during the covid-19 pandemic!  

Q4 recorded an increase in revenue by 13.9% compared to corresponding quarter in preceding year from RM 683.2mil to RM 777.9 mil, thanks to higher sales volume achieved under this quarter with an improvement of 18.3%. 

Profit before tax increased by RM 24.9 million or 22.1%, mainly due to higher sales revenue, lower raw material and energy cost coupled with the Group’s cost control initiative to reduce operation costs for the current quarter. 

12M FY20 VS 12M FY19

The Group achieved sales revenue of RM 2.9 billion, increased by RM 96.7 million or 3.4% from RM 2.8 billion recorded in corresponding period in preceding year. The higher sales revenue reported was mainly due to increase in sales volume of 8.8%. The average selling price reduced by 4% in tandem with lower raw material cost and competitive industry pricing.

Profit before tax increased by RM 5.4 million or 1.0% to RM 556.2 million as compared to RM 550.8 million in corresponding period in preceding year. The increase in profit before tax was mainly due to higher sales volume. 

Q4 FY20 VS Q3 FY20

Revenue for the quarter amounted to RM 777.9 million, eased by RM 18.6 million or 2.3%. The lower sales revenue was attributed to lower average selling price. The operating profit increased by RM 19.6 million or 12.7%, to RM 173.8 million as compared to previous quarter of RM154.2 million mainly due to lower raw material and energy cost. Profit before tax for the quarter decreased by RM 22.1 million or 13.9% as compared with previous quarter mainly due to net foreign exchange loss of RM 36.5 million. 

Prospect Highlight:

1. The group has commissioned up to 4 out of 12 lines in Plant 6.

2. New purchase of 95 acres land in banting to serve for the future NGC 2.0 capacity expansion.

Inventories were remained similar amount compared to preceding quarter as recorded RM 276.039 mil. Total trade payables and receivables are slightly increased. 

Comment:

1. As I reckoned that the expected EPS for Q4 FY20 was 3.6sen and the result come lower by 5%. Understand that the previous plant utilization rate had achieved more than 85% and limited upside to increase further on their sales volume. Hence, I would expect the increase in revenue and profit will only be seen in Q1 FY21 onward mainly contributed by the increases in rubber glove ASP, lower material cost and operating cost. 

2. The group was unable to pick up new lines commission speed; only 3 additional new production lines were complete commissioned under this quarter, partly due to the MCO. Production capacity would not able to increase to secure more demands at this stage, expecting another 3 more lines put into operation for next quarter.

3.  Cheaper electricity cost, discount given by TNB during MCO period. Lower material cost as reported that Nitrile prices have reduced by 8% in May. 

4. UOB Kay Hian Research mentioned that ASP have risen more than 10% while the delivery lead times have extended to 3-4 months. 

By assuming all the factors above, an increasing in ASP by 5% and 8% lower operating cost compared to preceding year, I expect EPS for FY21 can achieve 14.34sen which is 11.7% higher;(5%+8%)x0.9 with 10% discount rate. In the condition that Harta's ASP would follow market trend, as quarter prospect didn't highlight on the future selling price outlook. By taking PE of 50, the TP would be RM 7.17. 

Although I believe the coming FY21 Harta can achieve higher profit margin compared to FY20 but the current stock price is overpriced by 27% at RM9.13 the time of this writing. I would give an on hold or sell call on this stock depending on the price chart trend movement.