• Following the jump in crude oil prices, the FBM KLCI staged a two-day rebound yesterday, lifted by gains in selective index heavyweights. The lower liners and other sub-indices on the broader market also followed suit with the exception of the Mining sub-index that fell by 0.8%.
• Market breadth was positive as gainers outnumbered losers on a ratio of 551-to- 303 stocks. Traded volumes increased by 16.9% to 1.80 bln shares.
• Genting (+32.0 sen) led the heavyweight winners on the FBM KLCI, followed by UMW (+30.0 sen), Petronas Chemicals (+22.0 sen), Axiata (+17.0 sen) and CIMB (+16.0 sen). On the broader market, the major gainers include Ge Shen (+19.0 sen), Oriental (+17.0 sen) Latitude Tree Holdings (+27.0 sen) and MSM (+25.0 sen).
• On the contrary, some of the key decliners of the day were Huat Lai Resources (-20.0 sen), Scientex (-12.0 sen), Petron Malaysia (-14.0 sen), NSOP (-10.0 sen) and F&N (-8.0 sen). Meanwhile, BAT (-50.0 sen), Petronas Gas (-20.0 sen), PPB (-10.0 sen), Maxis (-5.0 sen) and Petronas Dagangan (-4.0 sen) were among the main index-linked heavyweight losers.
• Most Asian stockmarkets closed higher amid the increase in crude oil prices – the Hang Seng and Nikkei rose 1.1% and 0.2% respectively, while the Shanghai Composite Index increased by 3.3%. ASEAN indices, meanwhile, also closed mostly in the positive territory.
• U.S. stockmarkets rallied yesterday, led by gains in consumer discretionary and industrial sectors, while the Nasdaq Composite closed 2.3% higher as Groupon Inc (+41.2%) staged a big rally.
• In Europe, however, the DAX and CAC fell 0.8% and 0.1% respectively amid the slump in German’s economic sentiment. The FTSE, however, outperformed on higher utilities and financial sector performances.

THE DAY AHEAD

• We expect stocks on Bursa Malaysia to sustain their near term upside on the back of the calmer market conditions. The ongoing recovery will be aided by the positive overseas market conditions, despite the prognosis of a still fragile global economic environment. As it is, the ongoing recovery is mainly due to the recent oversold conditions and may not prolong due to the sustained economic concerns. 
• In the meantime, the next resistances at the 1,670-1,680 levels could be retested as we expect increased market participation as more investors return to the market after their Chinese New Year break. This will also lift market breadth with more retail investors taking advantage of the mildly positive market conditions to undertake trading activities. Therefore, we expect the lower liners and broader market stocks to also see renewed buying interest over the near term.

COMPANY UPDATE

• Hartalega Holdings Bhd’s 3QFY16 net profit rose 47.0% Y.o.Y to RM72.8 mln, due to higher output capacity from the on-going NGC plant expansion, higher demand and the favourable exchange rate. Revenue for the quarter improved 39.0% Y.o.Y to RM398.0 mln. 
• For 9MFY16, cumulative net profit gained 26.6% Y.o.Y to RM195.9 mln. Revenue for the period added 30.6% Y.o.Y to RM1.10 bln. The reported earnings came within our expectations, accounting to 72.4% of our full year estimated net profit of RM270.4 mln. Meanwhile, the reported 9MFY16 revenue also came within our expectation as it accounts to 75.5% of our full year revenue of RM1.46 bln.

Comments

• Hartalega remains as one of the key beneficiaries from the weakness in the local currency against the U.S. Dollars, as the bulk of the company products are exported globally. Following the introduction of three new production lines in NGC in 3QFY16, Hartalega’s operations now comprises a total of 64 production lines with a total installed capacity of 13.94 bln pieces of gloves per annum. 
• As the reported earnings came in within our estimates, we leave our earnings forecast unchanged. With its recent share price retracement, we think the stock now offers significant value and we raise our recommendation to BUY (from Hold), but with a lower target price of RM5.90 (from RM6.00). Our target price remains based on a 30% premium to its peer’s average of 20.4x (from 20.7x) on its FY17 EPS of 22.2 sen.
• The higher valuation matrix is premised on: (i) Hartalega’s position as the global market leader in the ever-growing nitrile glove industry, (ii) superior operational efficiency in terms of production speed and number of workers per glove output, and (iii) solid fundamentals where it commands the highest net profit margin vs. its peers. At current price of RM4.98, we think Hartalega is attractive, trading at prospective PERs of 30.2x and 22.4x for FY16 and FY17 respectively.

Source: M+ Online Research - 17 Feb 2016