Results

• 9MFY15 revenue of RM840.9m was translated into core net profit of RM160.5m (-17.2% yoy). This came in within our expectations but below consensus, which accounted for 72.2% and 70.7% of HLIB and consensus full year estimates, respectively.

Deviations

• In line.

Dividends

• Declared second interim dividend of 3.0 sen per share, bringing YTD dividend to 6.0 sen.

Highlights

• 3Q15 sales revenue increased to RM286.4m (+6.9% yoy, +4.1% qoq) despite continuous reduction in ASP, thanks to favourable currency conditions.

• EBITDA margin improved by a paltry 0.4ppt yoy to 27.9% as Hartalega still facing high NGC start-up costs as well as increase in electricity and natural gas costs.

• As NGC capacity has yet to contribute, production capacity for the current quarter has remained fairly stable at 3.5bn pcs from the current 55 lines. Utilisation rate has improved marginally to 88.1%, expecting to remain at this level which is considered to be full capacity.

• During the quarter, cost related to NGC amounted to RM5.8m, which would otherwise results in core net profit to be at least RM54-55m or EBITDA margin of 30%.

• Two production lines in NGC have been tested and commissioned in January 2015 and other production lines will come on stream progressively.

• Revenue contribution from latex has improved by 4.0ppt albeit Hartalega’s focus to continue on selling nitrile glove given the strong demand for nitrile glove globally.

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: RM7.43

Positives

• Leader in nitrile glove market; highest ROE andnet profit margins; most efficient and profitable glove maker; and appreciation of USD. 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 nitrileglove market.

Valuation

Reiterate HOLD on the back of unchanged TP of RM7.43. Our valuation is pegged to an unchanged multiple of 16.2x of CY16 EPS, based on 1SD above 5-year historical average P/E (see Figure #6).

Source: Hong Leong Investment Bank Research - 11 Feb 2015