-  We maintain our HOLD recommendation on Hartalega Holdings but trim our fair value to RM6.00/share. This is premised on an unchanged target PE of 17x.

-  We have reduced our FY14F-FY15F earnings by a further 2%-4% in view of the earlier-than-expected onset of price competition. We now anticipate ASP to decline by an additional 2% for nitrile gloves (93% of sales volume) and 6% for latex gloves.

-  Albeit at a smaller quantum, this represents our second earnings downgrade in a month following a revision in May when we clipped Hartalega’s FY14F-FY15F earnings by 9%-21%. Back then, we had cautioned that the group’s earnings would be capped by capacity constraints (CY13-14: +2% vs peers’ 3%) as well as an 8% ASP decline in FY14F-FY15F.

-  Despite the healthy global demand for rubber gloves (FY14F: +10%-15%), the group’s delays in its capacity expansion plans and current oversold position place it at a disadvantage to its peers. This is more pressing given that nitrile gloves (of which it is the market leader at 19%) remain the key growth segment.

-  We also take stock of Hartalega’s concentrated customer base. Its top two customers contribute ~45% to total sales, making the group more sensitive to pricing pressures. We gather that one of its major customers had recently reduced its orders by 200mil pcs (~1.6% of FY14F volumes).

-  As such, we foresee some earnings headwinds seeping through from 2QFY14F onwards. We anticipate some consensus earnings downgrades amid weakness in its sequential earnings momentum. Our forecasts now stand at 3%-4% below consensus.

-  YTD, Hartalega’s share price has appreciated by 16%, extending its 2012 rally in which it outperformed the FBM KLCI by 52ppts. While this can be in part attributed to the recent re-rating of the rubber glove sector, we believe it is priced to perfection and a pullback may be imminent.

-  We opine that at current price levels, Hartalega’s valuations are expensive. It is trading at a PE of 19x-21x its fully-diluted FY14F-FY15F EPS. This is close to 3SD above its 3-year trend average of 12x.

-  No change to our FY14F-FY15F gross DPS forecasts which are in line with management’s minimum payout ratio of 45%. With the recent run-up in its share price, yields have however compressed to an average of 2.2%.

Source: AmeSecurities