• Hartalega’s 1HFY19 PATAMI of RM245.1m (+16.9% yoy) was in-line with our and consensus FY19 forecast at 47% and 48% respectively.

• Strong 1HFY19 was due to robust demand for nitrile gloves leading to higher sales volume (+15.4%) as well as higher ASP (c.+4%) yoy.

• QoQ PATAMI nevertheless dropped 3.7% to RM120.2m mainly due to foreign exchange loss and slightly higher effective tax rate.

• Maintain Hold with unchanged TP of RM6.80 based on CY19 EPS pegged to PER of 39x.

Strong 1HFY19 PATAMI in-line with our forecast

Hartalega posted strong 1HFY19 results with revenue and PATAMI rising to RM1,420.6m (+19.8%) and RM245.1m (+16.9%) respectively. This was driven by increased in sales volume (+15.4%), mainly from additional capacity from NGC Plant 5 as well as higher ASP (+c.4% yoy) in tandem with increase in nitrile cost.

Lower qoq performance

Revenue rose by 1.1% qoq mainly due to higher ASP (c.+4.8%) resulting from higher nitrile prices cost pass through which was able to mitigate lower sales volume (c.-3.8%). Net profit dropped 3.7% to RM120.2m mainly due to foreign exchange loss and slightly higher effective tax rate of 1.2ppts to 15.4%. Overall, net profit margin was lower by 0.9ppts qoq to 16.8%. The lower volume is not unexpected due to resumption of vinyl gloves production in China. However, we estimate sales to slowly pick up from Hartalega’s new antimicrobial gloves (AMG).

Lower dividend declared

Hartalega declared lower first interim DPS of 2.2 sen compared to previous year’s 3.5sen. We expect FY19 DPS of 8.5sen based on dividend payout >50%, translating into dividend yield of 1.3%.

Outlook remains positive moving forward

We remain optimistic on Hartalega’s outlook on the back of robust global demand for nitrile gloves (60% Malaysia’s export), as well as on its strategic expansion plan (refer table 2), strong USD versus ringgit and product innovation. Additionally, we are positive on Hartalega’s AMG, which has started its first shipment in September to a major German medical supplier and had received orders from over 10 countries. We estimate AMG to contribute 10% of Hartalega’s total export volume during its first year with competitive pricing, i.e. c.5% premium versus nitrile glove ASP to encourage better take up rate.

Maintain Hold with TP of RM6.80

We maintain our earnings forecast and Hold recommendation with TP unchanged at RM6.80 based on 39x PER (+1.5SD above 3-years historical mean forward PE) pegged to CY19 EPS. The premium valuations are justified by its nitrile glove leadership position, strong operating efficiencies and higher margin compared to its peers, in our view.

Source: BIMB Securities Research - 9 Nov 2018