- Following our recent company visit, we reaffirm our HOLD recommendation on Hartalega Holdings (Hartalega) with a slightly lower fair value of RM5.00/share (vs. RM5.10/share previously). Our fair value is now pegged to a PE of 15x FY14F EPS, a premium to the sector’s 14x but 20% below industry proxy Top Glove’s 19x.

- While we maintain our FY13F (Mar YE) estimates, we have cut our FY14F and FY15F earnings by 9% and 21%, respectively, to reflect:- (1) the delays in its capacity expansion plans; and (2) declining ASPs on the back of intensifying price competition.

- Against the backdrop of healthy global rubber glove demand (FY13F: +10%-15%), the group’s expansion delays (CY13-CY14 capacity growth of 2% vs. peers’ average of 3%) and current oversold position place it at a disadvantage to its peers. This is more pressing given that nitrile (NBR) gloves, of which Hartalega is the market leader at 17%, remain the key growth segment. (NBR 3-yr CAGR: +37% vs. latex:-5%).

- Hartalega’s current installed capacity of 11bil pcs per annum (p.a.) is set to rise by 26% in FY14F and a lower 10% in FY15F. This follows an 8-month delay in the construction and commissioning (estimated August 2014) of its NGC project in Sepang, which we anticipate would result in a loss of production of 220mil pcs or a topline decline of RM23mil over both years.

- To mitigate this, we understand that Hartalega has ongoing plans to acquire a 25,000-acre land in Bestari Jaya to build 3 plants dedicated to the production of higher-valued specialty gloves (margins +8% above NBR gloves).

- While concerns about overcapacity of NBR gloves are abating, the more hostile pricing environment and declining input costs have prompted Hartalega to reduce its ASPs by 8% for FY14F to USD31/1,000pcs. Further discounts are limited by the industry’s rising cost following:- (1) the implementation of the minimum wage policy (FY13F impact for Hartalega: +10%); (2) potential hike in fuel prices; as well as (3) loss of tax incentives by its peers.

- Nonetheless, we expect Hartalega’s superior EBITDA margin to remain stable ahead at ~32% (FY12: 31%) contributed by:- (1) its high productivity and efficient operations; and (2) nitrile’s intrinsic pricing advantage over latex (discount to latex of 10%).

- Concomitant to our FY14F-FY15F earnings cut, we have revised downwards our gross DPS forecast to 15 sen and 16 sen, respectively. Its yields of ~3% are comparable to Top Glove’s but 1ppt below Kossan’s and Supermax’s.

- Hartalega is set to release its FY13 results on May 7. We believe our FY13 earnings estimate of RM227mil (+13% YoY) will be met, supported by:- (1) favourable NBR input prices (-24% YoY); and (2) healthy +24% YoY growth in volume sales.

Source: AmeSecurities