Results

4QFY14 core net profit of RM47.6m (-22.4% yoy, -13.5% qoq) elevated FY14 to RM241.5m (+3.5% yoy) was within our expectations, accounting for 102.7% and 97.1% of HLIB and consensus full year estimates, respectively.

Deviations

In line.

Dividends

Declared a third single tier interim dividend of 3.5 sen per share (4QFY14: 3.5 sen) with ex-date on 26th May 2014.

YTD dividend amounted to 10.5 sen per share (FY14: 10.5 sen) was below our expectations of 14.5 sen.

Highlights

4QFY14 sales revenue climbed 3.9% yoy and 4.7% qoq to RM280.4m on the back of continuous expansion in production capacity and increase in demand (+12.4% yoy, +5.3% qoq).

However, EBITDA margin was reduced to 28.2% (-4.2ppt yoy, -2.32ppt qoq). The margin compression was due to lower ASP (which was attributed to the confluence impact of price competition and lower raw material costs) as well as higher operating expenses.

Hartalega shared that the flat FY14 PAT (+0.1% yoy) due to higher staff recruitment cost for NGC project, increase in tax rate due to exhaustion of tax incentives and higher depreciation expense (FY13: RM31.9m vs. FY14: RM45.2m) due to higher asset base.

Production capacity stalled at 3.5bn pcs from the current 55 lines. This pushed utilisation rate to 86% (3QFY14: 82%) in order to capture the marginal growth in demand.

As expected from the current imbalance demand-supply situation, ASP for NR glove fell 18.4% yoy while nitrile glove fell 6.1% yoy.

Little change in sales mix (ratio of latex to nitrile) from 10:90 in 3QFY14 to 9:91 in 4QFY14.

The NGC (Next Generation Integrated Glove Manufacturing Complex) project in Sepang is expected to commence operation by 4QCY14 with additional of 2 production lines.

Risks

• Further reduction in ASP amid steep competition.
• Surge in nitrile and latex prices.
• Shift in demand from nitrile gloves to natural latex gloves, if prices of natural latex fall significantly below that of nitrile.
• Depreciation of USD vs. MYR.

Forecasts

Rolled over model with a tweak in fundamental variables based on latest data. As a result, FY15 and FY16’s EPS were adjusted by +1.0% and -13.1% respectively.

Rating

HOLD, TP: RM5.78

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 HOLD after lowering our TP by 10.5% from RM6.46 to RM5.78 reflecting our EPS revision. Our valuation was pegged to an unchanged multiple of 16.2x of CY15 EPS, based on 1SD above 5-year historical average P/E (see Figure 6).

Source: Hong Leong Investment Bank Research - 7 May 2014