Investment Highlights

• Hartalega’s foresight and execution hold it in good stead with its visible capacity expansion and its new product launch, against the backdrop of earnings delivery.

• We maintain our HOLD recommendation with a DCF derived FV of RM5.70/share (WACC: 7.3% terminal growth: 2.5%). It implies a P/E of 32x CY19F. We believe elevated valuations are justified by Hartalega’s potential inclusion into the FBM KLCI, its leading glove producer position and high earnings visibility (3-year earnings CAGR FY18-FY21 of 15.6%).

• Hartalega recorded a 4QFY18 profit of RM116.6mil (QoQ: +3%, YoY: +30%), bringing FY18 to RM439.4mil (YoY: +55%). It came broadly in line with consensus forecasts, at 103% of estimates.

• Hartalega’s key highlights included: 1. Topline for the quarter grew 2.3% QoQ against volume growth, aided by the full commissioning of Plant 4 and robust volume demand. It was partially offset by marginally lower ASPs (QoQ: -1%) and the weaker USD/MYR (QoQ: -4%). 2. Hartalega’s newly developed gloves, anti-microbial gloves will be launched in Europe in May 2018. It will be priced competitively to gain better uptake. Therefore, we do not expect for it to be margin accretive. It would however, better insulate itself from an influx of homogenous glove supply going forward. 3. Plant 5’s (4bil or 13% of existing capacity) progressive commissioning from 1HCY18 onwards, to meet demand for its anti-microbial gloves. While capacity for Plant 5 has already been filled, it should marginally lower the plant’s elevated utilisation rate of 89%. 4. Operating margins came in lower by 1.1ppts QoQ for the quarter. Aside from lower ASPs, cost crept up, particularly fuel and labour cost.

• We expect Hartalega’s robust growth to be driven by its capacity expansion in the midst of its new anti-microbial gloves, which they believe should be the new industry standard. Our USD/MYR sensitivity estimates earnings to be impacted by +5% for every +10% deviation from our FY19F assumption of MYR4.00/USD.

• Key risks to Hartalega include capacity delays, a weaker MYR and a sharp appreciation in cost.

Source: AmInvest Research - 16 May 2018