Results

1QFY14 net profit of RM62.9m (+1.0% qoq, +17.9% yoy) accounted for 23.5% of HLIB and 23.8% of consensus full year forecasts respectively.  We consider the results to be within expectations given that more production capacity will commence in coming quarters coupled with the appreciation of USD against MYR. Deviations  Largely in line. Dividends  None (1QFY13: none). Highlights

1QFY14 sales rose 12.2% yoy and 3.1% qoq to RM278.0m on the back of continuous expansion in production capacity and increase in demand.

Continuous expansion brought total capacity to 53 lines (+2 lines qoq and +8 lines yoy), boosting quarterly production output to 3.1bn pcs (+3.4% qoq and +20.6 yoy).

However, the mismatch growth between sales and volume was attributed to lower ASPs where NR glove ASP was down by 21.7% yoy from RM138/k pcs to RM108/k pcs while nitrile glove ASP was down by 11.4% yoy from RM110/k pcs to RM96.87/k pcs.

Little change in sales mix (ratio of latex to nitrile) from 6:94 in 4QFY13 to 7:93 in 1QFY14.

EBITDA margin improved by 3.7-ppt yoy and 1.9-ppt qoq to 35.4% thanks to easing 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 and latex prices.
• Shift in demand to natural latex gloves from nitrile gloves, if prices of natural latex fall significantly below nitrile.
• Depreciation of USD vs. MYR.

Forecasts

Unchanged.

Rating

HOLD, 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

Reiterate our HOLD call on the equity on the back of unchanged TP of RM6.37 derived based on 17.5x CY14 EPS.

After the industry-wide rerating, we believe that the postrallied share prices have factored in all the positive catalysts and see limited upside going forward.

Source:Hong Leong Investment Bank Research - 7 Aug 2013