• Overview. 2QFY20 PATAMI declined by 14% yoy to RM103.9m due to lower ASPs (-8% yoy), higher operating cost (mainly packaging & natural gas) as well as higher effective tax rate of 24% (+8.7 ppts). On qoq basis, PATAMI grew 10% yoy due to increase in sales volume (+13%) despite lower ASPs (-2.6%). Additionally, lower upkeep and labour cost during this quarter contributed to higher earnings.

• Key highlights. Hartalega’s plant utilization rate in 2QFY20 improved to 85% (from previous quarter 76%), due to increase in sales volume (+13% qoq, +8% yoy). Utilization rate is expected to remain above 85% in 4Q of CY2019 due to resilient demand as well as absence of new capacity expansion this year.

• Against estimates: Below. 1HFY20 PATAMI declined 19% yoy to RM197.9m. This was below ours and consensus forecast at only 37% and 41% respectively. The main deviation against our forecast was due to lower than expected sales and higher effective tax rate.

• Earnings revision. Global demand for nitrile glove is still growing and the glove tariff hike from US-China trade war could slightly benefit Hartalega. Despite expecting better 2HFY20 results, we believe that our previous forecast is not achievable, hence we revised down our FY20 and FY21 earnings by 17% and 15% respectively as we impute a i) cut in sales volume growth and ii) higher effective tax rate. However, EBITDA margin is likely to be sustainable due to ongoing cost efficiency efforts and automation.

• Dividend. A first interim DPS of 1.8 sen was declared. We expect FY20 DPS of 7 sen based on dividend payout >50%, translating into dividend yield of 1.3%.

• Our call. Maintain HOLD with a lower TP of RM5.10 (from RM5.40) following our earnings revision and valuation rollover to FY21 EPS pegged to unchanged 34x PER.

Source: BIMB Securities Research - 6 Nov 2019