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CLSA Hartalega 1Q2014 b

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Hartalega RM6.79 - BUY Financials Year to 31 March 12A 13A 14CL 15CL 16CL Revenue (RMm) 931 1,032 1,158 1,303 1,520 Rev forecast change (%) - - (3.2) (1.8) (3.1) Net profit (RMm) 201 235 267 299 325 NP forecast change (%) - - 1.2 3.2 1.5  EPS (sen) 27.7 32.2 34.9 39.1 44.7 CL/consensus (13) (EPS%) - - 101 103 104 EPS growth (% YoY) 5.7 16.6 8.4 11.8 14.4 PE (x) 24.5 21.1 19.4 17.4 15.2 Dividend yield (%) 1.8 2.1 2.4 2.7 3.0 ROE (%) 36.1 34.3 32.5 30.5 28.3 Net debt/equity (%) (22.3) (15.0) (10.3) (6.9) (5.5) Source: CLSA Find CLSA researc h on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our [email protected] proprietary database at clsa.com Indar Dhaliwal [email protected] +60(3)20567826 7 August 2013 Malaysia Healthcare Reuters HTHB.KL Bloomberg HART MK Priced on 6 August 2013 KLSE C omp @ 1,78 4.6 12M hi/lo RM6.85/4.21 12M price target RM8.00 ±% potential +18% Shares in issue 484.5m Free float (est.) 44.5% Market cap US$1,556m 3M average daily volume RM4.7m (US$1.5m) Major shareholders Harta lega Industrie s 55.5% Stock performance (%) 1M 3M 12M Absolute 4.6 28.1 52.6 Relative 3.9 25.8 40.2 Abs (US$) 3.2 20.3 47.6 0 50 100 150 200 250 2.4 3.5 4.6 5.7 6.8 Aug- 11 Fe b-12 Aug- 12 Feb-13 Hartalega (LHS) Rel to Comp (RHS) (RM) (%) Source: Bloomberg www.clsa.com  e  s  u l   t  s r  e i   e Defying gravity Hartalega’s 1Q14 results were in-line with ours and consensus forecasts with net profit of RM62.9m (+18%YoY). Operating margins continue to defy gravity and saw an increase of 110bps YoY to 29.5% due to continued easing of raw material costs and strengthening MYR. We reduce our ASP assumption resulting in a cut to NP but we increase our MYR/USD assumption to RM3.20 until 2015 and cut our feedstock forecasts to US$1,200/tonne (from US$1,400) resulting in upgrades to earnings. We increase our TP to 8.00 based on a 20 x PE mul tiple ap plied to CY14 EPS and upgrade our rec to BUY. Harta lega is our preferred pic k in the gloves space due to its nitrile segment leadership and USD exporter status and we recommend investors to switch from Top Glove (U-PF). Positive signs Hartalega reported 1Q14 net profit of RM62.9m (+18%YoY) which was in-line at 24% CLSA a nd cons ensu s foreca sts. T op-l ine growt h was only +1 2%Y oY but continued easing in raw material costs and efficiency gains saw operating expenses only increase by 8%YoY. Therefore, there was an increase of 110bps in operating margins which is a big positive for the company. Catering for demand Demand growth continues to be robust at +20%YoY in stark contrast to the latex segment which is s eeing still weak demand at 5-8%Y oY . Hart aleg a commissioned 10 new lines in July, to meet demand in the interim ahead of the planned NGC expansion in 2014, as utilisation continues to be sky-high at 91%. Therefore, pr ofits are expected t o pick up in 2H of FY3 /14. Adjusting assumptions Given the continued weakening in feedstock costs, we have trimmed our feedstock (butadiene) a ssumption to US$1,20 0/tonne (fro m US$1,400) flat until 2015 and als o adjusted our forex assumptio n to MY R3.20/USD un til 2015 which leads to earnings upgrades. Accordingly, we have trimmed our ASP assumption in-line with the lower feedstock costs cutting our revenue. The best BUY Hartalega checks all the boxes being a USD exporter as well as benefitting fro m lower commodi ty costs. Its n itr ile foc us sets i t apar t fro m the competition such as Top Glove (U-PF) whom is facing competition in the latex segment. As such, we upgrade our recommendation to BUY (from O-PF) with a raised TP of RM8.00 based on a 20x PE multiple to CY14 earnings.
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  • 7/27/2019 CLSA Hartalega 1Q2014 b

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    HartalegaRM6.79 - BUY

    Financials

    Year to 31 March 12A 13A 14CL 15CL 16CL

    Revenue (RMm) 931 1,032 1,158 1,303 1,520

    Rev forecast change (%) - - (3.2) (1.8) (3.1)

    Net profit (RMm) 201 235 267 299 325

    NP forecast change (%) - - 1.2 3.2 1.5

    EPS (sen) 27.7 32.2 34.9 39.1 44.7

    CL/consensus (13) (EPS%) - - 101 103 104

    EPS growth (% YoY) 5.7 16.6 8.4 11.8 14.4

    PE (x) 24.5 21.1 19.4 17.4 15.2

    Dividend yield (%) 1.8 2.1 2.4 2.7 3.0

    ROE (%) 36.1 34.3 32.5 30.5 28.3

    Net debt/equity (%) (22.3) (15.0) (10.3) (6.9) (5.5)

    Source: CLSA

    Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our [email protected] proprietary database at clsa.com

    Indar [email protected]+60(3)20567826

    7 August 2013

    MalaysiaHealthcare

    Reuters HTHB.KLBloomberg HART MK

    Priced on 6 August 2013

    KLSE Comp @ 1,784.6

    12M hi/lo RM6.85/4.21

    12M price target RM8.00% potential +18%

    Shares in issue 484.5mFree float (est.) 44.5%

    Market cap US$1,556m

    3M average daily volume

    RM4.7m (US$1.5m)

    Major shareholders

    Hartalega Industries 55.5%

    Stock performance (%)

    1M 3M 12M

    Absolute 4.6 28.1 52.6

    Relative 3.9 25.8 40.2

    Abs (US$) 3.2 20.3 47.6

    0

    50

    100

    150

    200

    250

    2.4

    3.5

    4.6

    5.7

    6.8

    Aug-11 Feb-12 Aug-12 Feb-13Hartalega (LHS)

    Rel to Comp (RHS)

    (RM) (%)

    Source: Bloomberg

    www.clsa.com

    Re

    sultsreview

    Defying gravityHartalegas 1Q14 results were in-line with ours and consensus forecasts

    with net profit of RM62.9m (+18%YoY). Operating margins continue to

    defy gravity and saw an increase of 110bps YoY to 29.5% due to

    continued easing of raw material costs and strengthening MYR. We

    reduce our ASP assumption resulting in a cut to NP but we increase our

    MYR/USD assumption to RM3.20 until 2015 and cut our feedstock

    forecasts to US$1,200/tonne (from US$1,400) resulting in upgrades to

    earnings. We increase our TP to 8.00 based on a 20x PE multiple applied

    to CY14 EPS and upgrade our rec to BUY. Hartalega is our preferred pick

    in the gloves space due to its nitrile segment leadership and USD exporter

    status and we recommend investors to switch from Top Glove (U-PF).

    Positive signsHartalega reported 1Q14 net profit of RM62.9m (+18%YoY) which was in-line

    at 24% CLSA and consensus forecasts. Top-line growth was only +12%YoY

    but continued easing in raw material costs and efficiency gains saw operating

    expenses only increase by 8%YoY. Therefore, there was an increase of

    110bps in operating margins which is a big positive for the company.

    Catering for demand

    Demand growth continues to be robust at +20%YoY in stark contrast to the

    latex segment which is seeing still weak demand at 5-8%YoY. Hartalega

    commissioned 10 new lines in July, to meet demand in the interim ahead of

    the planned NGC expansion in 2014, as utilisation continues to be sky-high at

    91%. Therefore, profits are expected to pick up in 2H of FY3/14.

    Adjusting assumptions

    Given the continued weakening in feedstock costs, we have trimmed our

    feedstock (butadiene) assumption to US$1,200/tonne (from US$1,400) flat

    until 2015 and also adjusted our forex assumption to MYR3.20/USD until

    2015 which leads to earnings upgrades. Accordingly, we have trimmed our

    ASP assumption in-line with the lower feedstock costs cutting our revenue.

    The best BUY

    Hartalega checks all the boxes being a USD exporter as well as benefitting

    from lower commodity costs. Its nitrile focus sets it apart from the

    competition such as Top Glove (U-PF) whom is facing competition in the latex

    segment. As such, we upgrade our recommendation to BUY (from O-PF) witha raised TP of RM8.00 based on a 20x PE multiple to CY14 earnings.

    http://www.clsa.com/https://www.clsa.com/member/analysts/index.cfm?alogin=dhaliwi&pagename=bioshttp://www.clsa.com/
  • 7/27/2019 CLSA Hartalega 1Q2014 b

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    Defying gravity Hartalega - BUY

    7 August 2013 [email protected] 2

    Defying gravityFigure 1

    Hartalega: 1Q14 summary1QFY13 4QFY13 1QFY14 % YoY % QoQ

    Revenue 247.7 269.8 278.0 12.2 3.1

    Operating expenses (177.6) (190.1) (191.9) 8.1 1.0

    Other income 0.1 1.8 (4.0) nm nm

    EBITDA 81.5 88.8 100.8 23.8 13.6

    Depreciation (11.3) (7.3) (18.8) 67.0 158.4

    Operating profit 70.2 81.5 82.0 16.8 0.7

    Finance costs (0.3) (0.2) (0.1) (57.8) (21.1)

    Core PBT 69.9 81.3 81.9 17.2 0.7

    Taxation (16.5) (18.9) (18.9) 14.7 0.0

    PAT 53.4 62.4 63.0 17.9 0.9

    MI 0.1 (0.1) (0.1) (233.8) (20.2)

    Core Net profit 53.5 62.3 62.9 17.6 1.0

    EPS 7.3 8.5 8.6

    Margins

    Operating profit 28.4% 30.2% 29.5%

    PBT 28.2% 30.1% 29.5%

    Net profit 21.6% 23.1% 22.6%

    Effective tax 23.6% 23.2% 23.1%

    Source: Hartalega

    Figure 2

    Hartalega 1Q14: Customer split by geography

    Source: Hartalega

    North America

    54%

    Latam

    3%

    Europe

    30%

    Asia

    11%

    Oceania

    2%ROW

    0%

    Margins continue toexpand

    Mainly N America andEurope customers

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    Defying gravity Hartalega - BUY

    7 August 2013 [email protected] 3

    Figure 3

    Hartalega: 1Q14 cost breakdown

    Source: Hartalega

    Figure 4

    Hartalega: Feedstock (butadiene) prices

    Source: Platts

    Figure 5

    Glove: Peer comp

    Name BBG code Mkt Cap ADT PE (x) EPS Growth (%) ROE (%) Yield (%) PB (x)

    (US$bil) (US$m) CY13 CY14 CY13 CY14 CY13 CY13 CY13

    Hartalega HART MK Equity 1.5 1.5 20.0 18.4 9.5 9.0 30.3 2.8 6.2

    Top Glove TOPG MK Equity 1.1 2.5 16.3 14.8 9.3 9.9 16.8 3.2 2.6

    Ansell ANN AU Equity 2.2 14.5 15.3 12.5 9.4 10.8 16.6 2.4 2.6

    Supermax SUCB MK Equity 0.5 1.6 11.0 9.9 16.1 11.1 14.7 3.1 1.6

    Kossan KRI MK Equity 0.6 1.3 15.0 12.8 24.8 17.3 19.7 2.4 2.7

    Wgt Avg 16.3 14.3 11.5 10.8 20.4 2.7 3.5

    Source: CLSA *Bloomberg consensus for KRI, SUCB

    Feedstock44%

    Fuel

    9%

    Labour

    12%

    Packaging

    6%

    Chemical10%

    Overhead

    & others

    19%

    800

    900

    1,000

    1,100

    1,200

    1,300

    1,400

    1,500

    1,600

    1,700

    1,800

    1,900

    2,000

    2,100

    Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

    US$/t

    Feedstock is 44% ofcosts

    and they keep comingoff now at US$950/tonne

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    Defying gravity Hartalega - BUY

    7 August 2013 [email protected] 4

    Summary financialsYear to 31 March 2012A 2013A 2014CL 2015CL 2016CL

    Summary P&L forecast (RMm)

    Revenue 931 1,032 1,158 1,303 1,520

    Op Ebitda 289 337 385 435 479

    Op Ebit 257 305 343 383 416

    Interest income 0 0 (1) 0 0

    Interest expense 2 1 (2) (2) 0

    Other items 0 - - - 0

    Profit before tax 258 306 341 381 416

    Taxation (57) (71) (74) (82) (90)

    Minorities/Pref divs 0 0 0 0 0

    Net profit 201 235 267 299 325

    Summary cashflow forecast (RMm)

    Operating profit 257 305 343 383 416

    Operating adjustments - - - - -

    Depreciation/amortisation 33 32 41 52 63Working capital changes (44) 0 (18) (21) (33)

    Net interest/taxes/other (48) (70) (75) (84) (90)

    Net operating cashflow 197 267 291 330 356

    Capital expenditure (60) (188) (190) (214) (215)

    Free cashflow 137 79 101 116 141

    Acq/inv/disposals 0 - - - -

    Int, invt & associate div 4 0 (1) 0 -

    Net investing cashflow (57) (188) (191) (214) (215)

    Increase in loans (15) 0 0 0 0

    Dividends (87) (106) (120) (134) (146)

    Net equity raised/other 7 0 0 0 0

    Net financing cashflow (95) (106) (120) (134) (146)

    Incr/(decr) in net cash 45 (26) (20) (19) (5)

    Exch rate movements 1 1 1 1 1

    Opening cash 117 162 136 116 97Closing cash 163 137 117 98 93

    Summary balance sheet forecast (RMm)

    Cash & equivalents 163 137 117 98 93

    Debtors 111 142 159 179 209

    Inventories 98 99 109 123 148

    Other current assets 0 0 0 0 0

    Fixed assets 380 536 685 847 998

    Intangible assets 0 0 0 0 0

    Other term assets 0 0 0 0 0

    Total assets 752 914 1,071 1,247 1,449

    Short-term debt 13 13 13 13 13

    Creditors 55 88 97 109 131

    Other current liabs 13 13 13 13 13

    Long-term debt/CBs 12 12 12 12 12

    Provisions/other LT liabs 40 40 40 40 40

    Minorities/other equity 1 1 1 1 2

    Shareholder funds 620 749 896 1,060 1,239

    Total liabs & equity 752 914 1,070 1,247 1,449

    Ratio analysis

    Revenue growth (% YoY) 26.7 10.8 12.2 12.5 16.7

    Ebitda growth (% YoY) 4.8 16.4 14.2 13.2 10.0

    Ebitda margin (%) 31.1 32.6 33.2 33.4 31.5

    Net profit margin (%) 21.6 22.7 23.1 22.9 21.4

    Dividend payout (%) 45.0 45.0 47.3 47.3 45.0

    Effective tax rate (%) 22.0 23.2 21.6 21.6 21.6

    Ebitda/net int exp (x) - - 176.7 260.3 -

    Net debt/equity (%) (22.3) (15.0) (10.3) (6.9) (5.5)

    ROE (%) 36.1 34.3 32.5 30.5 28.3

    ROIC (%) 41.0 39.1 35.4 32.1 29.1EVA/IC (%) 31.3 29.4 25.7 22.4 19.4

    Source: CLSA

  • 7/27/2019 CLSA Hartalega 1Q2014 b

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    Defying gravity Hartalega - BUY

    7 August 2013 [email protected] 5

    Companies mentionedHartalega (HART MK - RM6.79 - BUY)

    Recommendation history of Hartalega Holdings Bhd HART MK

    Date Rec Target Date Rec Target

    27 Jun 2013 O-PF 7.00 09 Apr 2012 BUY 4.63

    08 May 2013 O-PF 5.80 02 Feb 2012 BUY 4.30

    18 Jan 2013 U-PF 5.10 14 Sep 2011 BUY 3.65

    22 Nov 2012 Dropped Coverage 18 Mar 2011 BUY 3.70

    Source: CLSA

    2

    3

    4

    5

    6

    7

    Stock

    price

    (RM)

    Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13

    Indar DhaliwalOther analystsNo coverage

    BUYU-PFN-R

    O-PFSELL

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