Harta: Earnings dipped sequentially due to fair value losses

Result Update

For QE30/9/2015, Harta's net profit was mixed; down 4% q-o-q but up 25% y-o-y to RM60 million while revenue rose 18% q-o-q or 38% y-o-y to RM379 million. Revenue rose q-o-q  basically due to increase in demand and the strengthening of the USD. PBT dropped q-o-q due to fair value loss on derivatives of RM21.649 million as compared to RM5.003 million loss in QE30/6/2015.


 Table: Harta's last 8 quarterly results



The huge fair value loss reminds me of a similar loss suffered by Kossan in 2009. In business, you have to hedge your risk against the occurrence of certain events. Under normal circumstances, the risk distribution is bell-shaped and the tails risk is minimal. Our MYR weakness should fall under the fat tails category where losses (and gains) are disproportionately higher. It probably would not recur in the next quarter or if it does recur, the losses would be less severe.

I have presented below the adjusted bottom-line for Harta (without the fair value losses from forex) and it shows its bottom-line and profit margin to be better.


Chart 1: Harta's last 32 quarterly results, with fair value losses from forex derivatives excluded 

Valuation

Harta (closed at RM5.22 yesterday) is trading at a trailing PER of 37 times (based on last 4 quarters' EPS of 14.25 sen). At this PER, Harta is deemed over-valued.

Technical Outlook

Harta is in a long-term uptrend over the past 6 years. Its long-term uptrend is well-supported by the 21-month SMA line at RM4.00 while its intermediate uptrend is supported by the 10-month SMA line at RM4.50. Neither one of these support is likely to be tested anytime soon. However, Harta is now trading a fair distance above the 10-month SMA line. In 2013, when a similar price run-up occurred, the stock then entered into a fairly sustained correction back to the 21-month SMA line.


Chart 3: Harta's monthly chart as at Nov 5, 2015 (Source: Share Investor)

Conclusion

Based on strong leadership in the rubber glove sector, good financial performance & capable management team, Harta is considered a good stock for long-term investment. However, its demanding valuation & recent sharp price run-up has pushed the stock to be rated as SELL INTO STRENGTH again.

Note: 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Harta.