Investment Highlights

• We maintain our HOLD recommendation on Hartalega with a lower FV of RM4.96/share (vs. RM5.52/share previously) after rolling forward our valuation period to FY21F and reducing FY20F, FY21F and FY22F earnings by 16.8%, 19.1% and 19.9% respectively.

• We have revised our earnings forecast to account for a more muted sales volume growth as well as a higher operating cost. Our FV is based on 33x FY21F P/E which is the group’s historical 3-year average forward PE.

• Hartalega’s 1QFY20 core net profit of RM96.1mil (-21.8% YoY; 12.0% QoQ) was below our and street’s estimates, accounting for 16.9% and 18.5% of full year’s forecasts respectively. The deviation was largely due to a lowerthan-expected sales volume.

• Hartalega’s 1QFY20 revenue fell 9.4% YoY to RM640.1mil (RM706.4mil in 1QFY19) due to an 8.5% decline in sales volume.

• The group’s EBITDA fell 10.2% to RM155.1mil in 1QFY20 from RM172.7mil in 1QFY19. EBITDA margin edged down by 0.2ppts to 24.23% in 1QFY20 from 24.46% in 1QFY19.

• Competition remains stiff in the rubber glove industry due to the influx of supply. However, the delay in expansion of circa 5.8bil pieces by glove players eases the supply influx situation.

• We are expecting the group’s topline to recover from 2QFY20 onwards. We also expect a 1-2% increase in ASP on the back of a gradual improvement in the group’s pricing power (blended ASP in 1QFY20 was USD23.4 per thousand pieces vs USD23.3 in 4QFY19) and a weakening MYR against USD.

• Despite a lower average ASP of USD23.4 per thousand pieces (vs USD24.8 in 1QFY19), reduced sales volume and higher labour, electricity and gas costs, Hartalega was able to sustain its EBITDA margin. We believe this is due to improved efficiencies and cost optimisation.

• As such, we think that the impact of higher gas tariff and other margin pressures will be partly mitigated by Hartalega’s costs optimisation efforts going forward. We anticipate EBITDA margin to be at circa 23.9% and 24.1% for FY20F and FY21F respectively.

Source: AmInvest Research - 7 Aug 2019