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Hartalega's Land Acquisition For NGC Completed
Posted Date : 14th June, 2013
Written by MIDF Research
Hartalega Holdings Bhd
(13th June, RM6.32)
Maintain neutral at RM6.30 with a revised target price of RM5.85 (from RM5.19)
Hartalega NGC Sdn Bhd, a wholly owned subsidiary of Hartalega Holdings Bhd, has entered into an agreement with Kumpulan Tanjung Balai Sdn Bhd for the acquisition of a 49ha tract in Labu, Sepang in Selangor, for RM97 million cash.
The acquisition will be funded by internally generated funds and bank borrowings. With a net cash position of RM170.3 million as at the end of the 2013 financial year ended March (FY13), we do not expect the acquisition to have any material effect on the group's gearing for FY14.
With the land acquisition completed, the group is set to start its next generation integrated glove manufacturing complex (NGC) project. The total project will cost RM1.9 billion and comprise 72 new high-tech production lines in six new factories. It has been accorded Entry Point Project status under the Economic Transformation Programme due to its high economic impact.
The project will be housed within a new site of about 38ha with several dedicated facilities. Other than the six manufacturing facilities, the compound will also house an administration office, a centre of excellence, a learning and development centre, a sports and recreation centre and employee accommodation.
The NGC project will be spread over two four-year phases and employ about 5,000 workers in total. The first phase is set to start this year and to be completed in 2017, comprising 42 production lines with total annual capacity of 16.5 billion gloves per year.
The second phase will run from 2018 to 2021, comprising 30 production lines with total annual capacity of 12 billion pieces per year.
As Hartalega is already the most efficient glovemaker, we view the land acquisition positively as the NGC will enable the group to enhance its position as the best glove producer in terms of profitability. With the sheer size of the project, we expect the group to be able to leverage economies of scale for its production processes and strengthen its position as the glove producer with the highest level of efficiency and productivity.
Currently, nitrile gloves make up about 40% of the global glove demand with the remaining 60% comprising latex gloves. However, in 2011, with Malaysia the world's largest rubber glove producer, total exports of nitrile gloves grew by 29% year-on-year (y-o-y), compared with the average annual 8% y-o-y growth for rubber gloves as a whole.
Furthermore, all major markets registered a contraction in latex glove imports, while registering growth in nitrie glove imports from Malaysia.
Consequently, nitrile gloves made up 39% of Malaysia's total rubber glove exports in 2011, up eight percentage points from the previous year. We expect the global trend of switching from latex to nitrile gloves to continue at around 20% annually over the foreseeable future for a couple of reasons -- the anti-latex policy being implemented by hospitals in developed markets due to protein allergy, and the still relatively lower raw material price of nitrile compared to natural rubber.
We do not expect any immediate impact on the group's earnings from the NGC project in FY14. As such, we maintain our "neutral" call with a revised target price of RM5.85. Our valuation is derived from the multiple of 16.9 times forecast FY14 earnings per share. This is higher than our previous benchmark of 15 times, based on the industry's weighted average price-earnings ratio.
Based on its track record, we are confident the group's management is more than capable of sustaining the revenue and profit growth of the group. However at the current price, we are of the opinion the stock is in line with the fundamentals and upside is limited. -- MIDF Research, 13th June
This article first appeared in The Edge Financial Daily, on 14th June, 2013.