- According to its filing on Bursa Malaysia, Hartalega Holdings has proposed to undertake a bonus issue on the basis of one bonus share for every existing ordinary share (1-for-1), at an entitlement date to be determined later.

- The bonus issue will be implemented by capitalising up to RM410.2mil from the group’s share premium and retained earnings accounts. Upon completion (tentatively in 3Q of 2015), this exercise will double the group’s outstanding number of shares from 820.4mil to 1,640.9mil and raise its share capital to RM820.4mil.

- This is Hartalega’s third bonus issue since its listing on Bursa in 2008. In 2010, the group had announced a 2-for-1 bonus and in 2012, it declared a 1-for-1 bonus together with free warrants on a 1-for-5 basis. The warrants had expired on 29 May 2015 and were subsequently delisted on 1 June 2015.

- While a bonus issue would not have an impact on Hartalega’s valuations/fundamentals (i.e. not value accretive to shareholders), it should improve the stock’s trading liquidity and further enhance its appeal. As such, we expect further bounce to the group’s share price in the short term on positive investor sentiment.

- YTD, the stock had gained 23%, outperforming the FBM KLCI by 26ppts. This is in line, albeit at a smaller quantum, to its peers’ YTD average growth of 40%. The strong share price performance of the rubber gloves players can be in part attributed to the sharp appreciation of the USD:RM exchange rate (YTD: +9%).

- Looking ahead, we maintain our view that the progressive commissioning of NGC will provide fresh growth impetus to Hartalega’s earnings. With low ASP continuing to spur global glove demand, management is confident of an earnings rebound in FY16F-FY18F as new capacity from its NGC plants progressively comes on-stream.

- No change to our BUY call on Hartalega and our FY16F-FY18F earnings estimates. Our fair value of RM9.40/share, based on an FY16F PE of 27x, is also unchanged.

Source: AmeSecurities Research - 8 Jul 2015