• Overview. 3QFY20 revenue increased to RM796.6m (12% qoq, 10% yoy), while PATAMI jumped to RM121.3m (17% qoq, 1% yoy). The better results were mainly due to higher sales volume (12.9% qoq, 17.4% yoy). For 9MFY20, PATMI fell by 12.5% yoy due to lower ASP (c.-5%), higher natural gas, R&D expenses as well as higher effective tax rate of 24% (+6.8 ppts).

• Key highlights. Hartalega’s plant utilization rate in 3QFY20 improved to 96% (from previous quarter 85%) on increased sales volume. Restocking activities were observed in the US and European markets during the quarter (partly due to flu season) with higher demand to continue, driven by the recent coronavirus outbreak. Utilization rate is expected to remain above 90% in CY2020, based on our estimate.

• Against estimates: Inline. 9MFY20 PATMI was inline with our and consensus forecast at 73% and 71%.

• Dividend. Lower second interim DPS of 1.8 sen (9MFY20: 3.6sen vs 9MFY19: 4.4sen). We expect FY20 DPS of 7sen, translating into DY of 1.2%

• Outlook. Moving forward, we are expecting better performance in subsequent quarters driven by the coronavirus scare, resulting in greater global healthcare awareness. As such, we have raised our earnings forecast higher for FY20/21 by 4%/8% respectively as we increased our sales volume and imputing a higher plant utilisation rate of 90% (+3-5 ppts). We expect EBITDA margin to hold at c.25% due to greater demand as well as cost optimisation and automation initiatives.

• Our call. Following earnings revision, we have derived a new TP of RM6.50 (from RM5.10) based on higher PER of 40.5x (1SD above 5-yrs historical forward mean) from 34x pegged on FY21 EPS. The premium to its peers can be justified by its leadership position in nitrile glove with greater innovation and automation. We also note that glove sector valuation rose by +2 SD during H1N1 (refer chart 2). Maintain HOLD as we believe the stock is fully valued with lofty valuation at 45x PER (vs sector PER 40x). Accumulate on dips.

Source: BIMB Securities Research - 12 Feb 2020