-  We maintain our HOLD recommendation on Hartalega Holdings but raise our fair value to RM6.45/share as we roll forward our valuation year to FY16F. This is based on an unchanged fully-diluted PE of 18x.

-  Hartalega recorded a 1QFY15 net profit of RM57mil (QoQ: +16%; YoY: -9%) on the back of turnover of RM279mil (QoQ: -0.4%; YoY: +0.4%). Annualised, the results met both our and consensus expectations.

-  The group’s topline was flat YoY as the additional contribution from newly commissioned lines (volumes: +7% YoY) was partially offset by declining glove ASPs.

-  We understand that stiff competition in Hartalega’s core nitrile gloves segment (92% of sales volumes) continued to trim its price premium. As it is, the group had raised its ASP by 2% in May to fully account for higher natural gas prices (+19%) but this was subsequently eroded.

-  ASP of nitrile gloves are lower by 6% YoY and 1% QoQ while that of latex gloves had declined by 23% YoY and 11% QoQ. The sharp fall in the latter can be attributed to greater sales of generic latex gloves (vs. specialised ones) to new customers.

-  Pricing pressure, together with higher costs (+7.7% YoY from increased staff, electricity and natural gas tariffs) had resulted in its EBITDA margin being squeezed by 5ppts YoY to 26%. This was 7ppts lower compared to its 5-year average of 33.4%.

-  While we acknowledge the group’s cost rationalisation efforts (-3% QoQ), we note that the sequentially higher earnings in 1Q was also aided by the normalisation of its tax rate to 24% from 30% in the preceding quarter. Costs are expected to tick up in the upcoming quarter due to start-up costs for its NGC.

-  With regards to the current Ebola outbreak in Africa, we understand that there have been no additional orders thus far. We believe that even if the situation escalates, the group’s gains may be limited given its 88% utilisation rate and high nitrile glove mix.

-  The group did not declare any dividends for this quarter. However, a final dividend of 4 sen/share in respect of FY14 was announced last week, bringing total dividends for the year to 14.5sen/share (46% payout ratio). This was within our expectations and translates to a yield of 2.2%.

-  Hartalega’s share price has rebounded by 18% from its low in early May following expectations of a recovery in its earnings when the first line of its NGC project is commissioned in Nov 2014. That said, we are taking a more cautious stance as new nitrile glove capacity from the other manufacturers may also be coming on stream at a similar time.

Source: AmeSecuriites