Results

1HFY14 net profit of RM126.2m (+12.8% yoy) accounted for 47.1% of HLIB and 47.2% of consensus full year forecasts respectively.

We consider the results to be within expectations given that more production capacity will commence in coming quarters along with higher demand as more users switch preference from latex to nitrile gloves.

Deviations

Largely in line.

Dividends

Declared 1st interim (single-tier) dividend of 3.5 sen (1HFY13: 3.5 sen) per share with ex-date on 27th Nov.

Highlights

2QFY14 sales rose 10.2% yoy and 1.1% qoq to RM281.0m on the back of continuous expansion in production capacity and increase in demand (+17.9% yoy and +1.5% qoq), which was partially offset by lower ASP.

Continuous expansion brought total capacity to 55 lines (+2 lines qoq and +9 lines yoy), boosting quarterly production output to 3.34bn pcs (+8.2% qoq and +24.9 yoy) with a lower average utilization rate of 86.0%.

However, the mismatch between sales and volume growth was attributed to lower ASPs where NR glove ASP was down by 22.4% yoy from RM125/k pcs to RM97/k pcs, while nitrile glove ASP was down by 9.5% yoy from RM105/k pcs to RM95/k pcs.

Little change in sales mix (ratio of latex to nitrile) from 6:94 in 1QFY14 to 9:91 in 2QFY14.

EBITDA margin improved by 3.0-ppt yoy and 0.2-ppt qoq to 35.6% thanks to decline 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 and latex prices.
• Shift in demand to natural latex gloves from nitrile gloves, if prices of natural latex fall significantly below nitrile’s.
• Depreciation of USD vs. MYR.

Forecasts

Unchanged.

Rating

SELL, 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

We downgrade our rating for this stock from HOLD to SELL 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 - 13 Nov 2013