- We reiterate our HOLD recommendation on Hartalega Holdings with an unchanged fair value of RM6.50/share. This is based on an unchanged PE target of 18.5x of FY15F earnings.

- Hartalega posted a sequentially lower 3QFY14 core net profit of RM55mil (-21% QoQ), bringing its 9MFY14 core earnings to RM194mil (+13% YoY). We deem the results to be broadly in line with our and consensus estimates.

- That said, the group’s overall performance continues to be marred by its unfavourable forex hedges. Incorporating the unprecedented cumulative forex loss of ~RM10mil for 9MFY14, its net profit would have been up by only 7% YoY.

- QoQ, Hartalega’s 3QFY14 revenue declined by 4.7%. This can be mainly attributed to the lower raw material prices, intense price competition in the nitrile segment and the high bargaining power of its customers. Blended ASP is down by 5% QoQ. YoY, its topline grew by 8.5%.

- Hartalega’s sales volume was also marginally lower QoQ as it underwent a major overhaul of its production lines. Utilisation rates fell to 82% in 3QFY14 from 86% in 2QFY14. YoY, however, volumes were up by an encouraging 16%, thanks to new capacity from Plant 6.

- The group continued to make inroads in Brazil with its latex gloves, which currently make up 10% of its product mix. This comes amidst its shrinking nitrile glove market share in North America (3QFY14: 47.9% vs. peak of 61.6% in 3QFY13) due to increased competition and management’s strategy to focus on the European market.

- While we note that there may be a slowdown in the switching momentum of nitrile to latex gloves following a reversal in price trends (nitrile is now trading at a premium to latex), management remains confident that the bullish trend for nitrile gloves will continue.

- In view of its lower efficiency, move down the value chain and higher labour costs (+1ppt QoQ), Hartalega’s EBITDA margin was squeezed by 8ppts QoQ to 25% in 3QFY14. For the nine months, it was marginally up by 2ppts.

- With regards to its NGC project, we understand that the commissioning of its first line will be delayed to 3QFY15. Construction costs may also exceed RM2bil (+20% above its initial estimate). Management may gear up to fund the project if there is a need as they have secured a RM100mil credit line.

- As anticipated, Hartalega declared a second single-tier interim dividend of 3.5 sen per share, which matches 3QFY13’s payout, quantum-wise. We continue to expect a payout ratio of 47% for FY14F, which translates to a 2% yield. 

Source: AmeSecurities