Results

4QFY13 net profit of RM62.3m (+2.9% qoq, +24.0% yoy) elevated full year earnings to RM234.7m (+16.3% yoy) was within our expectations, accounting for 102.3% of HLIB and 102.5% of consensus forecasts.

Deviations

In line.

Dividends

Declared a third single tier interim dividend of 3.5 sen per share (4QFY12: 3 sen), translating into a net yield of 6.4% that is ex on 21st May 2013.

YTD dividend amounted to 14 sen per share (FY12: 12 sen) commanding a yield of 2.6%, in line with our forecast of 14.5 sen per share.

Highlights

4QFY13 sales rose 12.3% yoy and 3.9% qoq to RM269.8m on the back of continuous expansion in production capacity and increase in demand, while YTD revenue surpassed the RM1bn mark indicating a strong 10.8% yoy growth.

Capacity was expanded by 6 lines, bringing the total to 51 lines from a year ago, boosting full year production output to 11.05bn pcs (+13.3% yoy) with an average utilization rate of 90.4%.

However, the mismatch growth between sales and volume was attributed to lower ASPs where NR glove ASP was down by 16.6% yoy from RM145/k pcs to RM121/k pcs, while nitrile glove ASP was down by 7.0% yoy from RM110/k pcs to RM102.3/k pcs.

FY13 EBITDA margin improved by 1.4-ppt yoy to 32.7% thanks to easing in raw material prices as well as operational efficiency of the new production lines.

Management believes that global demand for nitrile rubber gloves will continue to grow at a high rate of over 20% and the commencement of Plant 6 with an expected 30% (+3.9bn pcs pa) boost to its production capacity will capture this growing market.

Risks

• Delays in capacity expansion plans.
• Surge in nitrile latex prices.
• Shift in demand to natural latex gloves from nitrile gloves, if prices of natural latex fall significantly below nitrile latex.
• Depreciation of USD vs. MYR.

Forecasts

Unchanged.

Rating

BUY, TP: RM6.37

• Positives – Leader in nitrile glove market; highest ROE and net profit margins; most efficient and profitable glove maker. In the event of a price war, Hartalega’s earnings will be the least affected, shielded by its high profit margins.
• Negatives – Possibility of increased competition in nitrile glove market.

Valuation

Upgrade our HOLD call on the equity to BUY after revising our TP upward by 14.0% from RM5.59 to RM6.37 derived based on 17.5x CY14 EPS.

Our PE multiple was raised from 15.5x to 17.5x in view of another flu outbreak (coronavirus) which is believed to be more contagious and deadly than the avian flu (H7N9) in China, a boon to glove players and sentiment.

Source: Hong Leong Investment Bank Research - 08 May 2013