- We maintain our HOLD call on Hartalega Holdings but lower our fair value from RM6.45/share to RM6.30/share following its weak 2QFY15 results. Its annualised earnings of RM105mil for 1HFY15 had missed expectations, accounting for only 43% of our previous forecast and 41% of street estimates.

- The group’s 2QFY15 net profit had declined by 16% QoQ on the back of a 1.4% drop in revenue. The trend was also apparent on a cumulative basis, with 1HFY15 revenue and earnings easing by 1% and 17%, respectively.

- While we had anticipated the group’s FY15F earnings to remain soft due to capacity constraints and cost inflations, the compression in EBITDA margin was larger-than-expected (QoQ: -2ppts, YoY: -6ppts). Its EBITDA margin had remained below 30% for the third consecutive quarter.

- Management attributes this mainly to the sharp fall in ASP (YoY: -4% to -10%). The downtrend is parallel to that of the raw material prices, led by latex (-24% YTD). That said, we also attribute the large drop to the erosion of the price premium it commanded from its position as the dominant player in the previously niche nitrile glove segment.

- The group’s operating expenses had crept up by 1.6% QoQ while YoY, it was higher by 8.6%. This was largely due to the rising start-up costs for its NGC project in Sepang as well as higher electricity and natural gas payments from increased tariffs (+14% and +19%, respectively).

- Separately, on the battle against Ebola, we understand that there had indeed been a surge in demand (>100%) for Hartalega’s high risk gloves. However, contribution to earnings is still insignificant given that the segment represents only 1%-2% of its revenue.

- We also gather that the first two lines at its NGC plants will only begin commercial operations in December (vs. November previously) following its difficulty in obtaining an electricity connection. The deferment translates into an FY15F revenue loss of ~RM10.5mil.

- In view of this delay and declining margins, we have cut the group’s FY15F-FY16F earnings by 3%-7%.

- Hartalega declared a first single-tier interim dividend of 3sen/share. Our unchanged 14.5sen/share gross dividend forecast for FY15F is in line with management’s guidance.

- At the current price, Hartalega’s valuation is fairly steep and may have priced in the step-up in earnings from the NGC beginning FY16F. The stock is trading at a forward PE of 24x over its fully-diluted FY15F EPS (+2.5SD above its 3- year mean of 16x). Our fair value is pegged to a fully-diluted FY16F target PE of 18x.

Source: AmeSecurities