Results

9MFY14 core net profit of RM193.9m (+12.7% yoy) accounted for 72.3% of HLIB and 73.3% 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 2nd interim (single-tier) dividend of 3.5 sen (3QFY13: 3.5 sen) per share with ex-date on 4th Mar 2014.

YTD dividend amounted to 7.0 sen per share. (9MFY13: 7.0 sen).

Highlights

3QFY14 sales fell by 4.7% qoq to RM267.8m attributable to flattish volume shipment and lower ASP (in line with lower raw material costs).

No new line was commissioned but production capacity of the existing 55 lines was boosted by 6% qoq to reach 3.5bn pcs. Thus, utilization rate plunged to 82% compared to 3Q13 and 2Q14 with 90.6% and 86% respectively.

NR glove ASP was down by 15.0% yoy while nitrile glove ASP was down by 7.0%.

Little change in sales mix (ratio of latex to nitrile) from 9:91 in 2QFY14 to 10:90 in 3QFY14.

Sales to South America and Asia continue to grow in 9MFY14 as Hartalega continues to diversify its customer base and geographical outreach.

The NGC had started groundwork and infrastructure construction. Commissioning is expected in the 4QCY14.

Contrasting Top Glove’s guidance, Hartalega shared that there is no nitrile glove glut as sales orders remain healthy.

As part of cost reduction initiatives, Hartalega has tested the new automated packing prototype and expect this to enhance margin going forward.

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

Maintain SELL call 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- 12 Feb 2014