Results

1QFY15 core net profit of RM56.5m (-18.3% yoy, +18.8% qoq) accounted for 24.3% and 22.1% of HLIB and consensus full year estimates, respectively. This came in within our expectations but below consensus.

Deviations

In line.

Dividends

None (1QFY14: none).

Highlights

1QFY15 sales revenue stagnated at RM279.2m (+0.4% yoy, -0.4% qoq) in spite of an increase in sales volume (+9.6% yoy, +2.6% qoq). This indicates decline in ASP in both latex (-23.1%yoy) and nitrile (-6.2% yoy).

EBITDA margin of 29.8% was a reduction of 4.9ppt yoy. The margin compression was due to the hike in electricity and natural gas tariff as well as higher maintenance cost.

However, on a QoQ basis, EBITDA margin recorded an improvement of 1.7ppt thanks to better operation efficiency, which reduced maintenance and consumables costs, as well as easing staff recruitment cost for NGC (Next Generation Integrated Glove Manufacturing Complex) project.

Production capacity stalled at 3.5bn pcs from the current 55 lines. This pushed utilisation rate to 88.6% (4QFY14: 86%) in order to capture the marginal growth in demand.

Sales mix is noticed to be trending towards nitrile with the ratio of latex to nitrile of 10:90, 9:91 and 8:92 in 3QFY14, 4QFY14 and 1QFY15, respectively.

The NGC project in Sepang is set to commission its production lines by 4QCY14 and complete the construction of two plants by 4QCY15. To recap, NGC will house 6 plants of 72 production lines that produce 28.5bn pieces, doubling the total installed capacity to 42bn pieces upon completion.

Hartalega is banking on this incoming NGC capacity to provide sustainable earnings and mitigate concern of lower ASP that has been impacting top and bottom line.

Management shared that they do not expect price war. Instead, they attributed the lower ASP to declining raw material prices and more competitive product pricing.

Hartalega has recently relaunched its OBM brand and rebranded Pharmatex to Glove-On.

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

Unchanged.

Rating

HOLD, TP: RM6.12

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 on the back of unchanged TP of RM6.12. 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 #5).

Source: Hong Leong Investment Bank Research - 6 Aug 2014