Results Highlights

• Hartalega’s 3QFY19 net profit rose 6.0% Y.o.Y to RM119.8 mln, from RM113.0 mln in 3QFY18, on higher sales volume and ASPs. Revenue also grew 19.9% Y.o.Y to RM723.4 mln, from RM603.1 mln last year. As per usual, the group declared its second interim dividend of 2.2 per share, payable on 28th March 2019.

• Cumulatively, 9MFY19 net profit was 13.0% Y.o.Y higher at RM364.8 mln, compared to RM322.7 mln in the previous corresponding period, in-tandem with stronger sales contribution which saw revenue jump 19.9% Y.o.Y to RM2.14 bln, from RM1.79 bln a year ago.

• The reported net profit and revenue were broadly in-line with our forecasts, accounting to 70.2% of our previous full-year forecast net profit of RM520.0 mln, while revenue accounted for 73.1% of our estimated RM2.93 bln.

• We maintain our HOLD recommendation on Hartalega with an unchanged target price of RM5.60 by ascribing to a higher target PER of 30.0x (from 29.0x) to Hartalega’s FY20 EPS of 18.5 sen, given that its share price has fairly reflected its near-to-mid term growth prospects. The change in the target PER is in-line with the share price recovery among leading domestic glovemakers.

Prospects

The group has commissioned six-of-twelve lines in Plant 5, while the remainder is expected to be up and running by 1H2019. The construction of Plant 6, meanwhile, is on-track and is slated to be commissioned in 2H2019. Following the completion of the aforementioned facilities and Plant 7 (which is reserved for niche products), production capacity is expected to increase to 39.0 bln pieces in FY20 (assuming a commissioning rate of about 2 lines per month), from 28.5 bln pieces in FY18. Ongoing expansion and automation is expected to keep the group’s efficiency at high levels. Floor production rate is thus, foreseen to remain at 89.0%-90.0% from FY19-FY20.

On the downside, lower ASPs, tighter market conditions, slower-than-expected capacity expansion and volatile forex movements is expected to limit earnings and revenue growth in the near-to-mid term. Meanwhile, slower global demand could also potentially tilt the industry’s supply-demand dynamics in favor of the buyers and limit glove makers’ capability to pass-through costs increases, albeit a supply glut is not immediate, in-our view.

Regardless, we are still positive that Hartalega’s growth trajectory remains intact, driven by consistent topline growth and high efficiency levels, in-tandem with its gradual capacity expansion plans. Global glove consumption, meanwhile, is expected to remain steady at 8.0% per year.

A significant game changer lies in the reception of the group’s breakthrough gloves (i.e: Anti-Microbial Glove), which could sustain Hartalega’s strong double-digit margins and leading position in the nitrile glove segment over the long run. The group expects to secure the FDA approval to market the AMG in U.S. by end-2019.

Valuation and Recommendation

We revised our FY19-FY20 estimated net profit lower by 4.5% and 4.6% respectively following some housekeeping on tax assumptions, while revenue was reduced slightly to RM2.86 bln (-2.4%) and RM3.46 bln (-1.6%) on slightly lower utilisation rate.

Nevertheless, we maintain our HOLD recommendation on Hartalega with an unchanged target price of RM5.60 by ascribing to a higher target PER of 30.0x (from 29.0x) to Hartalega’s FY20 EPS of 18.5 sen, given that its share price has fairly reflected its nearto-mid term growth prospects. The change in PER is in-line with the share price recovery among glove bellwethers.

Our target PER remains at a premium to Hartalega’s 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 U.S. Dollar, thus any fluctuations in the USD/RM rate 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 - 13 Feb 2019