Investment Highlights

• We downgrade our recommendation on Hartalega to HOLD from BUY with a slightly lower FV of RM5.80/share. We have tweaked our FY19F, FY20F and FY21F forecasts downwards by 1.6%, 2.5% and 2.9% respectively to account for slightly lower EBITDA margin expectation (24.6% FY19F). Since our call upgrade (BUY on 11 Jan 2019), its share price has increased 7.7% from RM5.06 to RM5.45. As such, we opine that Hartalega is now close to its full valuation.

• Our fair value for Hartalega is based on DCF, which has a WACC of 7.3% and terminal growth of 2.5%. At our fair value of RM5.80/share, the implied CY19F P/E is 32.5x.

• 9MFY19 net profit of RM364.8mil (13% YoY) met both our and street’s estimates, accounting for 71.3%–71.8% of fullyear forecasts.

• Key highlights of Hartalega’s 3QFY19 results included: 1. 9MFY19’s topline grew 19.9% YoY on the back of higher ASP (+5.9% YoY) and a 13.0% YoY increase in sales volume, which was driven by growing demand and the 15.3% YoY rise in total capacity. 2. Comparing 9MFY19 against 9MFY18, Hartalega’s EBITDA rose 12.9% to RM521.4mil. EBITDA margins dropped slightly by 1.5ppts. This was attributed to a higher average NBR price in 9MFY19, which climbed 27.5%, coupled with a slightly stronger MYR against the USD, up 3.4% to an average of 4.08 in 9MFY19. However, it was offset by a higher ASP which is the cost pass-through mechanism in play, with an average of 1-2 months’ lag time.

• We believe Hartalega will be facing some margin pressure stemming from heightened competition in the nitrile segment as the big rubber glove producers ramp up their nitrile gloves capacity expansion (+14% in CY19). Our estimated EBITDA margin for FY19F and FY20F is 24.6% and 25.7% respectively.

• So far, Hartalega has commissioned 6 out of 12 lines in its Plant 5 (targeted to be fully commissioned by 1HCY19) while Plant 6 is expected to start commissioning its first line in 2HCY19. Construction of Plant 7 will start in May 2019. The company’s efficiency will only continue to increase with the addition of its latest plants.

• Hartalega is currently working to secure the FDA’s approval to market its antimicrobial gloves (AMG) in the US, which is expected to be obtained by end-CY19.

• We continue to like Hartalega for the management’s foresight and execution, its visible capacity expansion, product innovation and superior operating efficiencies.

Source: AmInvest Research - 13 Feb 2019