We maintain our HOLD recommendation on Hartalega. We have changed our valuation method from DCF to P/E valuation.
Based on an FY20F P/E of 33x (+1.5SDs), our fair value is reduced to RM5.52 (from RM5.80 previously). Our PE multiple is based on the 1 year forward PE industry average. We have cut our earnings forecast for FY19F and FY20F by 7.5% and 5.5% respectively.
Hartalega’s FY19 core net profit of RM456.2mil (up 3.9% YoY) was below our and street’s estimates, accounting for 90.6% and 86.7% of full-year forecasts respectively. The deviation was largely due to a sharp strengthening of the MYR against the USD in 4QFY19 and lower-than-expected ASP.
Key highlights of Hartalega’s FY19 results are: 1. Hartalega’s 4QFY19’s topline fell 5.5% QoQ to RM683.9mil due to a 4.7% QoQ drop in ASP and 0.8% QoQ decrease in sales volume. Competition is stiff due to an overcapacity in the rubber glove industry. This, coupled with a 2.1% strengthening of the MYR vs. the USD, resulted in a 5.0ppt reduction in EBITDA margin to 21.1% (24.7% in 3QFY19). 2. FY19’s topline grew 17.6% YoY on the back of a 6.5% YoY increase in ASP and 10.4% YoY increase in sales volume. The expansion in sales volume was driven by growing demand and a 14.2% YoY rise in total capacity to 32.5bil pieces per annum.
Comparing FY19 against FY18, Hartalega’s EBITDA rose 6.9% to RM665.4mil. However, EBITDA margin slipped 2.4ppt to 23.5% from 25.9% mainly due to a 20.2% increase in NBR price in FY19.
We expect Hartalega to continue facing margin pressures from the heightened competition in the nitrile segment as the large rubber glove producers ramp up their nitrile gloves capacity (+14% in CY19). Our estimated EBITDA margin for FY20F remains at 25.7%.
Hartalega has commissioned an additional 4 lines in Plant 5. Plant 6 is in its construction phase and would be commissioned at end-CY19.
Hartalega is currently working to secure the Food and Drug Administration’s approval to market its antimicrobial gloves (AMG) in the US. Approvals are expected to be obtained by end-CY19.
We continue to like Hartalega for its foresight and execution, capacity expansion, product innovation and superior operating efficiencies.
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