- We maintain our HOLD on Hartalega Holdings with an unchanged fair value of RM5.40/share. Our fair value is pegged to an unchanged target PE of 18x its fully-diluted FY15F earnings.

- Our recent meeting with management reaffirms our view of a muted FY15F, as earnings will continue to be capped by its lack of production capacity expansion (no new lines since full commissioning of Plant 6 in September 2013), a competitive pricing environment and higher operating expenses.

- Although Hartalega’s net profit is expected to inch upwards in the next quarter following the completion of plant maintenance works (current utilisation rate: 90%; 3Q14: 82%; 4Q14: 86%), a meaningful upturn in earnings would come, at the earliest, in Nov 2014 (3QFY15), when the first line of its NGC project is commissioned.

- Hartalega is pushing ahead with its planned capacity increase as it is confident that the additional 660mil pcs from NGC (by FY2015) can be absorbed. This is notwithstanding mounting industry overcapacity concerns and statistics from the MREPC, which showed a 5% QoQ (1QCY14) decline in Malaysia’s nitrile glove exports.

- Management is unperturbed, stating that the slip in demand may be seasonal and followed the usual stockpiling activities in 2H13 in anticipation of higher glove ASP during the wintering season (Feb-May).

- The group’s order lead time is currently stable at 2 months, with ASP flat at RM90-92/1,000 pcs. We gather that Hartalega had raised its ASP by 2% in May to fully account for higher natural gas prices (+19%). This was, however, eroded by competitive pressure which trimmed its price premium.

- The lower ASP (-33% over the past 2 years), coupled with an unfavourable operating environment, had resulted in Hartalega’s EBITDA margin being squeezed (for the second consecutive quarter) in 4QFY14 to 23.9% – nearly 10ppts below its 5-year average of 33.4%.

- Recognising this, the group has outlined several initiatives in a bid to improve efficiency and support its margins, including: (1) expanding its product range; (2) introducing new automation technology (10%-20% savings in labour costs); and (3) focussing on cost management.

- We are keeping our FY15F-FY17F forecasts and recommendation for now given the absence of any new development. Hartalega’s share price has retraced by 13% YTD, resulting in a current fully-diluted PE of 21x. This is 1.3SD above its 5-year mean PE.

Source: AmeSecurities