Results Highlights

• Hartalega’s 4QFY18 net profit jumped to RM116.6 mln (+30.4% Y.o.Y) compared to RM89.4 mln last year, mainly driven by higher sales volume from the strong demand for nitrile gloves. Revenue, meanwhile, also gained 17.0% Y.o.Y to RM616.8 mln vs. RM527.0 mln in 4QFY17. The group has also declared a second interim dividend of 2.0 sen per share, payable on 27th June 2018.

• Cumulatively, the group’s bottomline improved significantly by 55.3% Y.o.Y to RM439.4 mln, from RM283.0 mln a year ago, in-tandem with higher revenue contribution of RM2.41 bln (+32.0% Y.o.Y) vs. RM1.82 bln in FY17, as well as from a net forex gain of RM41.4 mln. The reported earnings came in broadly within our forecasts, accounting to 104.2% of our expected full year net profit of RM421.8 mln, although revenue was in-line with our FY18 forecasts.

• Hartalega has fully commissioned all the production lines in Plant 4 earlier this year. Moving forward, Plant 5 is expected to be commissioned in July 2018 with the new lines added progressively, while the construction of Plant 6 is underway. The group has also earmarked an additional plant – Plant 7 which will cater to smaller and specialty products.

• The group has announced its plans to spend more than RM14.0 mln to upgrade its Enterprise Resource Planning (ERP) system, in a bid to achieve Industry 4.0, which will in turn strengthen its business operations, promote integration of automation across its supply chain, increase operational efficiency and drive profitability in the long run. The ERP project is expected to be launched by end-2018 at Hartalega’s NGC plant in Sepang before rolling out in its Bestari Jaya plans in 2019.

Prospects

Moving forward, we expect margins to be slightly hampered by the implementation of foreign worker levy which started in January 2018, rising fuel costs and gas tariff hike, although the impact will be partly cushioned by higher ASPs as glove manufacturers pass-on most of the cost increases to consumers.

The group aims to ramp up its production volume by 15.0% to 20.0% in the next few years, which will increase its total manufacturing capability to more than 40.0 bln by 2020. At the current juncture, Plant 5 is scheduled for commissioning in July 2018, while the construction of Plant 6 is in-progress. Hartalega has also increased the factories built to seven factories, instead of the initially planned six, in order to cater to smaller run orders which will include specialty products. The latest plant in the pipeline is expected to begin construction around June this year and has a lower designed capacity of 2.6 bln pieces of gloves, just slightly more than half of the other six plants with only ten production lines. Subsequently, the group aims to commission Plant 6 and Plant 7 in 1Q2019 and March 2019 respectively.

Meanwhile, Hartalega’s non-leaching antimicrobial nitrile examination gloves are expected to be rolled-out in Europe in 31st May 2018.

The Malaysian Rubber Glove Manufacturers Association (Margma) expects to achieve more than 10.0% rubber gloves export growth to RM18.0 bln in 2018 (2017: RM16.2 bln) on positive supply-demand dynamics which supports our view of a still resilient demand for rubber gloves amid rising healthcare awareness.

Valuation and Recommendation

Although the latest full year results were largely within our estimates, we tweaked our FY19 forecasts slightly to account for a potential dent in its bottomline’s margin, inview of rising fuel costs, gas tariffs and the levy payments for foreign workers, albeit partially offset by cost-pass through mechanisms. Consequently, our revised FY19 net profit will now stand at RM421.8 mln (-1.3% Y.o.Y), although revenue is envisaged to be marginally higher amid its ongoing capacity expansion plans. Further, we introduce our FY20 net profit and revenue forecast of RM690.5 mln and RM3.74 bln respectively.

We maintain our HOLD recommendation on Hartalega with an unchanged target price of RM6.10 based on a higher target PER of 35.0x (from 34.5x) to the group’s FY19 EPS of 17.4 sen. The increase in the target PER is in-line with the recent rally in the share prices of industry peers. Meanwhile, a potential re-rating could be in the horizon for Hartalega if the U.S. Dollar continues to strengthen amid the heightened prospects of higher U.S. interest rates.

Our target PER remains at a premium to its competitors premised on: (i) Hartalega’s solid position as the global market leader in the nitrile glove segment, (ii) superior operational efficiency in terms of production speed and the lower number of workers per glove output, (iii) consistent and high quality control standards, and (iv) solid fundamentals where it commands the highest net profit margin vs. its peers.

Risks to our recommendation, however, could include rising raw material costs for both natural rubber latex and nitrile latex (both commodity based), which are subject to price fluctuations. Hartalega is exposed to foreign exchange fluctuation risk, given that both its sales and some of its raw material costs are denominated in the U.S. Dollar, thus any fluctuations in USD/RM will impact the company’s earnings. Meanwhile, the increasing production costs (electricity, gas and labour) could also pressure margin expansion, although slightly offset by the group’s cost saving measures and higher efficiency from the integration of its NCG plants, as well as the group’s ability to pass through the additional costs to customers.

Source: Mplus Research - 16 May 2018