• Hartalega 1QFY19 recorded a quarterly all-time high revenue and PATMI growing by 17.5% and 29.6% yoy respectively.

• The strong performance was due to robust demand for nitrile gloves leading to higher sales volume (+20.5% yoy, +6.4% qoq) supported by increased production capacity and improved operating cost efficiency.

• Overall, results were in-line with our full year forecast at 24.7%.

• Maintain Hold with unchanged TP of RM5.50 based on PER 34x applied on CY19 EPS for now, pending management meeting.

All-time high quarterly performance

Hartalega posted an impressive 1QFY19 results, as revenue and PATMI grew to RM706.4m (+17.5%) and RM124.9m (+29.6%) yoy respectively. This was driven by a 20.5% yoy sales volume growth, mainly due to strong demand for nitrile gloves supported by NGC plant running at higher utilization rate of 92% (vs 1QFY18:91%). Additionally, lower nitrile raw material cost yoy and improvements in operating efficiencies have resulted in higher EBITDA margin of 24.5% (+1.5ppts yoy).

Improved qoq performance

Revenue increased by 14.5% qoq mainly due to increase sales volume (+6.4%) and higher ASP (+8%) resulting from higher natural gas price cost pass through time lag. Nevertheless, bottom line grew slower at 7.5% impacted by margin compression of 1.1ppts which we believe was due to recent hike in nitrile raw material prices.

Outlook remains positive moving forward

We expect Hartalega outlook to remain strong on the back of robust global demand for nitrile gloves (60% Malaysia export), as well as its strategic expansion plans and product innovation. Hartalega’s NGC is on track to meet rising demand with the commissioning of Plant 5 (4.7bn pcs, +c.14%). The initial line is to start in early Aug with targeted 2 new lines each month. Moving forward, Plant 6 and 7 are targeted to commence production in 1HCY19 and 2HCY19 respectively, bringing additional capacity of 7.3bn pcs pa. Additionally, the group have launched its antimicrobial gloves (AMG) in Europe on 31st May 2018 and is working on FDA approval to enter the US market with competitive pricing to ensure better take-up rate.

Maintain Hold with TP of RM5.50

We estimate Hartalega FY19 earnings to grow by 15% yoy, supported by resilient demand, lower ringgit against USD and overall cost efficiency. We maintain our earnings forecast at this juncture pending management meeting next week. Maintain Hold with TP unchanged at RM5.50 based on 34x PER (+1SD 3-years historical mean) on CY19 EPS. We still like Hartalega for its leadership position in the nitrile gloves, strong operating efficiencies and higher margin compare to its peers.

Source: BIMB Securities Research - 8 Aug 2018