Hartalega Holdings - Decent Quarter, Stretched Valuation

Date: 16/05/2018

Source  :  KENANGA
Stock  :  HARTA       Price Target  :  5.00      |      Price Call  :  SELL
        Last Price  :  5.30      |      Upside/Downside  :  -0.30 (5.66%)

FY18 PATAMI of RM439.4m (+55% YoY) came in within expectations at 100%/98% of our/consensus full-year forecasts. Share price has run up by >100% over the last 12 months. We believe all the positives have been priced in and reiterate UNDERPERFORM. TP is RM5.00 based on an unchanged 32.5x PER (at +1.5 SD above 5-year historical forward mean) over CY19 EPS.

FY18 PATAMI of RM439.4m (+55% YoY) came in within expectations at 100%/98% of our/consensus full-year forecasts. A third interim DPS of 2.0 sen was declared this quarter, bringing YTD FY18 DPS to 7.0 sen. Typically, the final dividend is expected to be declared in 3Q18.

Key Result highlights. QoQ, 4Q18 revenue rose 2.3% due to higher sales volume (+3%) which was offset by lower ASP (-1%). The higher volume sales were the result of full quarter contribution from Plant 4. 4Q18 PBT margin decreased 1.1ppt to 21.9% from 23.0% in 3Q18 due to higher energy (natural gas) cost (+22%). This brings 4Q18 PBT to RM135.0m (-2.8%). However, 4Q18 PATAMI came in at RM116.6m (+3.2% QoQ) due to a lower effective tax rate of 13.4% compared to 18.5% in 3Q18.

YoY, FY18 revenue rose by an impressive 32% due to higher sales volume (+32%) underpinned by new capacity from NGC Plant 4. Correspondingly, PBT rose 51% as margin expanded by 2.8ppt to 21.9% in FY18 from 19.1% in FY17 due to increase in sales volume and improvement in operation efficiency on economies of scale from higher capacity. This brings PATAMI to RM439.4m (+55% YoY).

Outlook. Due to the robust demand for gloves, Hartalega NGC has fully commissioned all the 12 production lines in Plant 4. Looking ahead, the commissioning of Plant 5 will gradually commence, starting from July 2018 with construction of Plant 6 in 1Q19. Plant 5 and Plant 6 will each have annual installed capacity of 4.7b pieces. Additionally, Hartalega plans to set up Plant 7, expected in March 2019, which will focus on small orders as well as specialty products. Plant 7 will have an annual installed capacity of 2.6b pieces. We expect contributions from Plant 5 to drive FY19 earnings growth. Once completed, Plant 5 is expected to boost additional capacity by 16% to 33.1b pieces per annum. The group targets to launch its anti- microbial gloves in Europe by end May 2018 and is working on securing Federal Drug Administration (FDA) approval to enter the US market. All in, plant 5,6 and 7 will add a total capacity of 12.1b pieces, raising installed capacity by 43% to 40.6b pieces per annum.

Reiterate UNDERPERFORM. Reiterate UNDERPERFORM. TP is RM5.00 based on an unchanged 32.5x PER (at +1.5 SD above 5- year historical forward mean) over CY19 EPS. Near-term headwinds including appreciation of MYR against the USD, gas tariff hikes, and potential higher minimum wage could derail earnings.

Risks to our call. Higher-than-expected volume sales and faster- than-expected commissioning of new production lines.

Source: Kenanga Research - 16 May 2018

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