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.

  

Harta Q3 FY20 Review

Better profit due to higher sales volume!

Q3 report has recorded an increase of RM 73.1 mil or 10.1% on the group's sales revenue compared to corresponding quarter in preceding year. In the report explained that the higher sales revenue was due to increase in sales volume of 17.4%. 

PBT also improved 6.5% compared to corresponding quarter in preceding year from RM 150 mil to RM 159.7 mil mainly due to higher sales volume recorded during the current quarter. It was tallied to the increase in company's inventories recorded in Q2 report. 

Year to date, The Group achieved sales revenue of RM 2.146 billion, increased by RM 2.0 million or 0.1% from RM 2.144 billion recorded in corresponding period in preceding year. The higher sales revenue reported was mainly due to higher sales volume.

Profit before tax however eased by RM 19.5 million or 4.5% to RM 418.6 million as compared to RM 438.1 million in corresponding period in preceding year. The lower reported profit before tax was mainly due to lower average selling price and higher natural gas and R&D expenses. 

Q3 FY2020 vs Q2 FY2020

Revenue for the quarter amounted to RM 796.5 million, increased by RM 87.1 million or 12.3%. The higher sales revenue was attributed to higher sales volume for the quarter. Sales volume increased by 12.9%.

Profit before tax for the quarter increased by RM 22.3 million or 16.3% to RM159.7 million as compared with previous quarter mainly due to increase in sales volume and lower nitrile, chemicals, labour and electricity cost. 

Inventories has reduced by 8% from RM 303 mil from preceding quarter to RM 276 mil. Cash & cash equivalents also slightly reduced compared to preceding quarter.

 Total borrowing has reduced from RM 343.9 mil to RM 253.4 mil by 26%. 

Comment: 

Fundamental Analysis

As I explained earlier in Q2 review, sales orders for glove sectors will be locked in for around three months before the delivery of goods. Hence, from Q2 report I anticipated that increase in inventories was to prepare for orders secured and to be delivered in Q3. The increase in EPS was above my expectation as previous review I gave a 3.24sen EPS for Q3.

In current quarter, inventories has reduced compared to preceding quarter. We might see a slower growth in revenue in Q4 FY20. However, the recent on going coronavirus outbreak might boost up the group sales volume due to stronger demand on glove products. 

PBT for current quarter is not picking up with the revenue growth due to lower gross margin (19%) compared to preceding year with an overall gross margin of 22%.   

I anticipate that Q4 sales orders will still remain strong. Moreover, due to recent reduction in electricity cost on ICPT, a similar profit could be achieved in coming quarter. Hence, I estimate that the Q4 EPS could be maintained as 3.6sen by giving FY EPS to 12.99sen. 

By taking current PE of 49 or PE 38 (a year earlier) with a 30% growth. The TP would be RM6.36 - 6.63. 

Technical Analysis

Harta is in a major bullish trend, currently it is having a 3rd motive wave. I will continue to hold on my stocks to swim with the wave until the end. 

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.

Harta Q4 FY2019

Harta 4th quarter revenue has improved compared to preceding year due to higher sales volume. However, PBT affected by fluctuation in currency causing a reduction of 15.8%. Higher labour cost as the minimum wages adjustment took effect in earlier this year. 

Total year revenue increased by 17.6% due to the improvement in sales volume of 10.1%, in tandem with growing demands for nitrile gloves and continuous expansion for their production capacity.

Throughout the reporting period, USD/RM trend is very fluctuating. It can drop around 2% within a month. Hence, export sectors who their operating revenue and operating cost are very sensitive with foreign currency will get affected. 

Looking at the asset, the management has reduced their inventories in this quarter. Trade receivables have increased which showing signs of more sales have yet to receive payments. It is good for management to reduce their inventories, as it can show that their operation processes are lean enough. However, payment receivable might show that the recent market is not doing great.

Total liabilities has increased by 15.2%. Although long term borrowing has slightly reduced, short term borrowing on the other hand has increased by 15%. Checking on operating activities, it is still maintained growing positively. Hence, the company performance is considered very healthy. Borrowing might be used in the plant expansion activities.

Compared to previous quarter, the group reported the reduction in sales revenue was mainly due to lower average selling price. Meaning that, currently the group is facing keener price competition on selling niltrile gloves as mentioned by few research houses.

The management has mentioned again in its prospect that currently company is facing over supply issue where supply grows faster more than demand.

Comment:
1. Management has admitted that the gloves have been over produced. Therefore, it will take some time for market to absorb the access capacity remain and industry players will slow down their production capacity expansion activities to align with market demand growth. I anticipate it will take a year for the market to recover.
2. Currency has been growing rapidly from end of March until now. Q4 report showing that the currency has badly affected the profit, on the other hand, the coming Q1, we shall see profit gain from USD/RM strengthening.
3. Company is not performing in Q4, as management was unable to hedge the fluctuation in the currency and the market demand has reduced. Therefore, I believe tomorrow there will be a heavy sell down pressure on Harta. The support line is RM 4.87. If the price cannot hold above it, it will be a bullish trend coming soon.