- We reiterate our BUY call on Hartalega Holdings with an unchanged fair value of RM7.90/share. This is based on an unchanged fully-diluted FY16F PE of 23x.

 - Hartalega posted a 3QFY15 net profit of RM50mil (QoQ: +3%; YoY: -14%) to report cumulative 9MFY15 earnings of RM155mil (YoY: -16%). The results accounted for 69% of our and 68% of consensus estimates. It also declared a second interim dividend of 3 sen/share.

 - The main reason for the slight miss in expectations is its higher-than-expected opex (QoQ: +3%; YoY: +9%). This comes as the group front-loaded the costs related to the construction of its NGC. In 3QFY15, the additional expenses amounted to RM5mil, resulting in a higher cost per glove of 6.62 sen vs. 6.46 sen (excluding the RM5mil). In 2QFY15, it was 6.48 sen.

 - Following this, we have lowered Hartalega’s FY15F earnings estimate by 6% to RM211mil while maintaining its FY16F and FY17F forecasts, for which we have imputed higher opex. Management has guided for no further cost surprises.

 - As we had noted in our earlier reports, the glove manufacturers, including Hartalega, would be prime beneficiaries of a strengthening USD (vs. the RM) given their positions as net exporters. This was proven in the group’s 3QFY15 numbers, which showed a QoQ revenue increase of 4% and 1ppt EBITDA margin expansion in tandem with the 7% appreciation of the USD during the quarter.

 - The positive topline growth can be mainly attributed to the 3% rise in its blended ASP (in RM terms) – the first since 1QFY13 – and to a lesser extent, its marginally higher (+1%) sales volume. Net profit growth was, however, slower partly due to the quarter’s higher effective tax rate of 28%.

 - Compared to the same period last year, its 9MFY15 revenue was higher by 1.7% but earnings had declined by 16% as its EBITDA margin contracted from 33.5% to 28.7%. This can be mainly attributed to higher labour, electricity and natural gas costs as well as a squeeze in its ASP from lower raw material prices and competitive pressures.

 - We believe that Hartalega’s earnings are presently at an inflection point given that its first two NGC lines had been commissioned in Jan 2015 (total of six new lines in 4QFY15 translating to incremental revenue of ~RM290mil). With low ASP continuing to spur global glove demand, management is confident of an earnings rebound in FY16F-FY17F as new capacity from its NGC plants progressively comes onstream.

 - Since our upgrade in Dec 2014, the stock has rallied by 12%. Valuation-wise, it is currently trading at a forward fully-diluted PE of 21x. We deem a premium to its mean of 16x to be justified given its game-changing NGC project, dominant position, and above-average financial and operational indicators.

Source: AmeSecurities