• Hartalega’s PATAMI decline by 23.7% qoq to RM91.4m mainly due lower sales revenue resulting from higher nitrile glove competition, strengthening of ringgit and increase in labour cost.

• FY19 PATAMI rose to RM456.2m (+3.9% yoy) mainly due to higher sales volume (+10%) and ASP (c.+6%) yoy. However, margin dropped 2.1ppts due to higher overall operating cost.

• A third interim DPS of 1.9 sen was declared, bringing YTD FY19 DPS to 6.3sen.

• We revised downward our FY20/FY21 earnings forecast by 6%/3% respectively on account of lower sales volume growth expectation and higher operating cost.

• Maintain Hold with lower TP of RM5.40 based on 34x PER pegged to FY20 EPS.

Lower qoq earnings on higher competition and operating cost

Revenue declined to RM683.9m (-23.7% qoq) on the back of lower sales volume (-1%) and ASP (-4.7%) as a result of higher competition in nitrile glove. PATAMI fell further by 23.7% qoq to RM91.4m mainly due to the strengthening of ringgit (ringgit rose to 4.04 versus USD in March) within a short time frame which the group was unable to fully pass on the corresponding cost to customer. Additionally, higher labour cost and other operating cost also contributed to the lower PATAMI. Net margin was compressed to 13.4% (-3.2ppts).

Higher FY19 PATAMI but short of our target

Hartalega’s FY19 revenue grew 17.6% yoy on the back of higher sales volume (+10%) mainly from NGC Plant 5 additional capacity of 14% yoy with utilization rate of 88% and higher ASP (+c.6% yoy). Despite this, PATAMI only increased by 3.9% yoy with margin declining by 2.1ppts to 16.1% (FY18: 18.2%) due to higher operating cost. Overall, PATAMI was below ours and consensus full year forecast at 91% and 93% respectively.

Challenging outlook persists

Hartalega is continuing to expand its production capacity, which will raise capacity by c.24% to 40.5bn pa by 2020 (refer table 3). Moving forward, we are cautious on higher competition in nitrile glove which may cause ASP to come under pressure. Additionally, slowdown in global economy, ringgit fluctuation and higher operating cost especially labour would add pressure in the near term. However, this could be partially mitigated by Hartalega’s ongoing cost efficiency efforts and automation.

Maintain Hold with new TP of RM5.40

We revised downwards our earnings forecast for FY20/FY21 by 6%/3% respectively to account for lower sales volume growth expectation due to higher nitrile glove competition and higher operating cost. Maintain our Hold call on Hartalega with a lower TP of RM5.40 (from RM5.80) based on unchanged 34x PER pegged on FY20 EPS.

Source: BIMB Securities Research - 8 May 2019