Investment Highlights

• 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.

Source: AmInvest Research - 8 May 2019