• Hartalega’s 9MFY19 PATAMI of RM364.8m (+13% yoy) was contributed by robust demand for nitrile gloves leading to higher sales volume (+9.6%) as well as higher ASP (c.+6%) yoy.

• QoQ PATAMI nevertheless was flat at RM119.8m (-0.4% qoq) mainly due to higher effective tax rate.

• Overall, PATAMI came slightly below our full year forecast at 69%.

• We revised downward our FY19/FY20/FY21 earnings forecast by 4%/5%/5% respectively on account of the slightly lower sales volume than expected and lower ASP.

• Maintain Hold with lower TP of RM5.80 based on FY20 EPS pegged to lower PER of 34x.

Higher 9MFY19 PATAMI but short of our target

Hartalega posted higher 9MFY19 results with revenue and PATAMI rising to RM2,144m (+19.9%) and RM364.8m (+13%) respectively. This was driven by increased in sales volume (+9.6%), mainly from additional capacity from NGC Plant 5 as well as higher ASP (+c.6% yoy) in tandem with increase in nitrile cost yoy. Overall, PATAMI was slightly below our full year forecast at 69%.

Flat qoq performance

Revenue and PBT rose to RM723.4m (+1.3%) and RM150m (+5.4%) qoq respectively. This is mainly due to higher sales volume (c.+3%) which was able to mitigate lower ASP (c.-1.7%). We believe lower ASP was due to increase in competition of nitrile glove, resulting in lower prices. PATAMI was flat (-0.4%) due to increase in provision for tax and deferred tax expenses resulting in higher effective tax rate of 5.5ppts to 20.4%.

Lower dividend declared

Lower second interim DPS of 2.2 sen (9MFY19: 4.4sen vs 9MFY18: 7.5 sen). We expect FY19 DPS of 8sen, translating into dividend yield of 1.5%.

Outlook remains challenging on higher competition

Hartalega is continuing to expand its production capacity, which will raise capacity by c.23% to 42.3bn pa at end 2020 (refer table 2). Moving forward, we expect utilization rate to be stable at c.85%-88% on the back of growing global demand. However, we may see margin deterioration as more nitrile gloves capacity come on stream thus exerting downward pressure on ASP. We revised downwards our earnings forecast for FY19/FY20/FY21 by 4%/5%/5% respectively to account for slightly lower sales volume than expected and lower ASP.

Maintain Hold with new TP of RM5.80

We maintain our Hold call on Hartalega with a lower TP of RM5.80 (from RM6.80). This is based on earnings revision and lower PE of 34x (in line with its historical 5 years average) from 39x previously. Lower PE is on account of expected higher nitrile glove competition as well as lack of rerating catalysts to drive valuations higher.

Source: BIMB Securities Research - 13 Feb 2019