• Hartalega posted another good set of results, as net profit for 9MFY18 grew by 66.7% YTD to RM322.7m.

• Earnings grew on higher sales volume (+33.5% yoy). Margin also improved on the back of lower raw material prices and improvement in operating efficiency.

• Higher dividend declared of 4sen (vs 3QFY17: 2sen). 1:1 Bonus issue proposed.

• Maintain Hold recommendation with a TP of RM11.00 based on PER 34x (+1SD above 3-year historical mean) on CY19 EPS.

Stronger earnings.

Hartalega’s posted an impressive 9MFY18 results, as revenue and net profit grew to RM1.8bn (+38% yoy) and RM322.7m (+66.7% yoy) respectively. The results were in-line with our full year earnings forecast at 73%. The good set of results was driven by a 33.5% yoy sales volume growth, mainly from additional capacity in NGC while average utilization rate increased to >90% from around 88% a year ago. Additionally, low raw material prices and improvements in operating efficiencies have resulted in net profit margin higher by 3ppts.

Improved qoq performance

PBT increased slightly 1.2% qoq mainly due to higher sales volume of (+4%) despite lower ASP compared to previous quarter.

Outlook remains positive

We believe gloves demand for FY18 should remain robust helped by growing nitrile gloves in the medical industry as well as increasing demand for lighter weight nitrile gloves (below 3.0g) due to product substitution for China vinyl gloves. Currently, the company has about 30bn capacity p.a which is now running at utilization rate of above 90% and fully sold for 3 months until April. Hartalega’s NGC is well on schedule to meet this rising demand with the completion of Plant 4 (all 12 lines operational) and has started construction of Plant 5. Moving forward, Hartalega is expected to launch a new innovative product i.e. non-leaching antimicrobial medical glove in Europe by 2Q 2018 and is working on securing FDA approval to enter the US market.

Higher dividend declared

Second interim DPS of 4 sen was declared which brings current total dividend for FYE March 2018 to 7.5 sen (vs 9MFY17: 4 sen). We expect full year DPS of 16 sen, translating into divided yield of 1.5%. The group also proposed a 1-for-1 bonus issue of up to 1,714 million new ordinary shares based on an entitlement date that will be determined later. We are positive on this 2 announcements as it rewards shareholders and improves trading liquidity in the stock.

Hold recommendation with TP of RM11.00

We maintain our TP of RM11.00 based on 34x PER (+1SD above 3-years historical mean) on CY19 EPS. The premium valuations can be justified by its leadership position in nitrile glove, strong operating efficiencies and higher margin. While we are confident in Hartalega’s good earnings prospect, we believe this has been largely priced in. Maintain Hold.

Source: BIMB Securities Research - 7 Feb 2018