• Hartalega’s 1HFY18 earnings of RM209.7m was slightly above our estimates making up 56% of FY18 forecast.

• Earnings grew 64.6% YTD on higher sales volume and ASPs. EBITDA margin also improved on the back of lower raw material prices and improvement in operating efficiency.

• Higher dividend declared of 3.5sen (vs 1H17: 2sen).

• We raised FY18 and FY19 forecasts by 9.9% and 9.5% respectively on higher expected sales volume. Maintain HOLD call with revised TP of RM8.70.

Stronger earnings.

1HFY18 earnings grew 64.6% YTD due to increase in sales volume (+32%), mainly contributed by additional capacity in NGC while average utilization rate increased to 92% from 88% yoy. In addition, 1HFY18 ASP is about 6% higher YTD due to resilient demand. EBITDA margins expanded by 3ppt.

Improved qoq performance

Earnings increased 17.6% qoq mainly due to lower nitrile and latex cost, lower chemical cost and improvement in operation efficiency.

Demand inelastic and stable input cost

The demand for nitrile gloves has been growing, helped by improving hygiene standards, growing use of examination gloves in the medical industry, and increasing demand for lighter weight nitrile gloves due to China tightening its regulations on manufacturing of vinyl gloves to address pollution hazard. Additionally, margin is expected to improve from stable raw material prices (current NBR price has dropped c.40% from its highest peak in March 2017), better cost management, automation and cost transfer ability.

Dividend declared

First interim DPS of 3.5 sen (1H17: 2sen) was declared. We expect full year DPS of 11sen, translating into divided yield of 1.4%.

Increasing our forecasts.

We raised our FY18 and FY19 earnings forecasts to RM417.6m (+9.9%) and RM447.5m (+9.5%) respectively as we impute stronger sales volume projection (+8% pa higher than previous estimates). NGC’s Plant 4 is expected to be completed in 1QCY18 which will increase production capacity by 18% to 31.7bn pcs. Plant 5 and 6 are also scheduled to be completed in 2019 and 2020 respectively with another 9.4bn capacity to be added.

Maintain Hold with new TP of RM8.70

We raised our TP to RM8.70 (from RM7.40) based on rolling 3-year average PER of 32x applied on FY19 EPS. We continue to like the stock for its sound fundamental and earnings prospect. We recommend to accumulate on dips as valuation is slightly stretched due to recent surge in share price.

Source: BIMB Securities Research - 8 Nov 2017