• Overview. 1QFY20 PATAMI decline by 24.7% yoy to RM94.1m mainly due to lower sales and higher operating expenses. On qoq basis, PATAMI grew 3% yoy aided by lower cost of upkeep, electricity and packaging. Overall, Hartalega managed to maintain EBITDA margin at 24.2% (+3.1ppts qoq; -0.3ppts yoy).

• Key highlights. Hartalega’s plant utilization rate in 1QFY20 contracted to 76% (-8ppts qoq; -16ppts yoy), due to a decline in sales volume (- 7.9% qoq, -8.5% yoy) coupled with an increase in overall installed capacity (+2% qoq; +10.6% yoy). We believe the drop in sales volume was due to competitive pressure in the industry.

• Against estimates: Inline. 1QFY20 PATAMI made up 18% of our and consensus full year forecast. We anticipate better performance in subsequent quarters aided by healthy demand-supply dynamics as well as potential margin expansion from increase operating efficiency.

• Outlook. We expect Hartalega’s FY20 earnings to be lifted by continued expanding global demand supported by capacity expansion (refer table 2) and current weak ringgit. Despite anticipating higher competition due to increase Nitrile gloves capacity in the industry which could put pressure on ASPs, we expect profit margin to remain stable at 17% level underpinned by ongoing cost efficiency efforts and automation.

• Our call. Our earnings forecast remain unchanged at this juncture. Maintain Hold with TP of RM5.40 based on unchanged 34x PER pegged on FY20 EPS.

Source: BIMB Securities Research - 7 Aug 2019