Harta- the first break in an impressive profit growth

Results Update

Harta reported its first sequentially break in its bottom-line for QE30/9/2011. Its net profit dropped by 16% q-o-q or 2% y-o-y to RM46 million while its turnover increased by 4.6% q-o-q or 24.5% y-o-y to RM230 million (see Chart 1 below). The drop in profit margin (as reflected in Chart 20 is due to higher raw material prices (for both natural & nitrile latex) as well as recognition of unrealized forex losses & change in fair value of forex contracts of RM8.66 million. If the forex losses were excluded, the pre-tax profit would have only declined by 3.4% to RM58.3 million.


Table: Harta's last 8 quarterly results



Chart 1: Harta's last 19 quarterly results



Chart 2: Harta's profit margin for the last 19 quarterly results

Future Prospects

In an The Edge article entitled "Hartalega defends position in nitrile segment", the company makes its case why Harta will still perform commendably going forward. The main points to note are:

1) The price of nitrile latex has declined by more than the price of natural latex. From August to October, nitrile latex dropped by 14.3% from USD2.10 per kg to USD1.80 per kg, while natural latex declined by 11.6% from RM8.84 per kg to RM7.80 per kg;
2) The cost of producing nitrile gloves is 20% lower than the cost of producing NR gloves; and
3) The company is retrofitting its old production lines as well as installing new production lines that will increase its annual capacity to 13.2 billion pieces. This program will enable Harta to lower its production cost & maintain its profit margin.

Based on the above, the management believes that the company will be able to defends its position in the nitrile gloves segment, which is seeing stiff competition due to the entry of other players, such as Kossan, Topglov & Supermx.

Valuation

Harta (closed at RM5.46 yesterday) is now trading at a PE of 9.8 times (based on the last 4 quarters' EPS of 55.7 sen). At this PE multiple, Harta is deemed fairly valued.

Technical Outlook

Harta is now trading sideway. A triangle can be drawn onto the price movement over the past 10 months, where the support is at RM5.35 & resistance at RM5.70.


Chart 3: Harta's weekly chart as at Nov 8, 2011 (Source: Tradesignum)

Conclusion

Based on its good financial performance (albeit a slight drop), reasonable valuation and neutral technical outlook, I would rate Harta a HOLD. The proven management & the drop in the cost of raw material would be positive catalysts for re-rating but that re-rating may not come as investors are concerned about a possible margin erosion due to stiffer competition in the nitrile gloves segment.