- We reaffirm our HOLD recommendation on Hartalega Holdings with an unchanged fair value of RM5.40/share. This is based on a PE of 18x of its fully-diluted FY15F EPS.

- Hartalega reported a lower 4QFY14 net profit of RM49mil (QoQ: -15%) to end its FY14 on a flat note with earnings of RM233.2mil. The results were in line with our recently revised estimates and consensus, making up 98% and 94%, respectively.

- Hartalega registered a sales volume growth of 15% YoY in FY14 thanks to new capacity from the final three lines of Plant 6. That said, its turnover had only increased by 7% as average selling prices (ASPs) for both latex and nitrile gloves were reduced by 20% and 8%, respectively, over the year.

- We suppose that the group’s pricing power was adversely impacted by the entrance of new players into its core nitrile gloves segment (90% of product mix). In addition, the industry’s practice of cost-pass through pricing meant that ASPs had to be adjusted downwards in view of lower YoY prices for latex (-20%) and nitrile (-22%).

- Despite the sharp fall in raw material prices (42% of production costs), Hartalega’s EBITDA margin had contracted by 1ppt YoY to 28%. QoQ, it was a sharper 2.3ppts fall, from 26.2% to 23.9%.

- We gather that the margin compression, which reversed its top line growth, can also be attributed to:- (1) higher expenses (+12% YoY) due to more plant maintenance work and NGC start-up costs (including early employment); (2) unprecedented forex loss of RM8.6mil; and (3) greater proportion of latex gloves in product mix (FY14: 9% vs FY13: 6%).

- Furthermore, Hartalega was more affected by the expiration of the reinvestment allowance compared to its peers as it had no unutilised portion to offset the tax expense. Coupled with a reduced export allowance (from minimal top line growth), its tax rate had spiked to 29.7% in 4QFY14. For the full year, it was 24.4%.

- The group has declared a third single-tier interim dividend of 3.5 sen/share. Its total gross DPS of 10.5sen for FY14 thus far matches FY13’s. We expect a 4 sen/share final dividend to be announced during its AGM in August.

- We are keeping our FY15F and FY16F earnings estimates and have introduced our FY17F forecast, based on management’s guidance of a 15% YoY growth. Given the retracement of its share price (-17% YTD), the stock is now trading at a forward fully-diluted PE of 20x. This is 1.5SD above its 3-year trend average.

Source: AmeSecurities