Highlights

• Hartalega proposed a bonus issue on the basis on one bonus share for every one existing share held. As at 15 June 2015, the issued and paid up capital of the company stood at RM410m comprising of 820m shares.

• In order to proceed with bonus issue exercise, Hartalega is also seeking approval from SC to increase its authorised share capital from 1.5bn shares to 6.0bn.

• Upon completion of the proposal, enlarged issued and paidup share capital is expected be 1.64bn unit of shares.

• The proposal is expected to be completed by 3QCY15.

Comments

• We are positive on the news as it will help to improve the stock’s trading liquidity and marketability in the long run.

• This will mak e Hartal ega’s shares more affordable and enable a wider group of investors to participate in the growth of the company on top of improving the stocks’s liquidity, supported by favourable currency environment.

• Note that Hartalega currently trading at 25x P/E, compared to peers average of 19x, being the highest among its local peers.

• Post deal, our ex-all TP will be adjusted to RM4.23.

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: RM8.45

Positives

• Leader in nitrile glove market; highest ROE and net profit margins; most efficient and profitable glove maker; and appreciation of USD. In the event of a price war, Hart alega’s earnings will be the l east affected, shielded by its high profit margins.

Negatives

• Possibility of increased competition in nitrile glove market.

Valuation

Reiterate HOLD on the back of unchanged TP of RM8.45.

• Our valuation is pegged to an unchanged multiple of 18.4x of CY16 EPS, based on 1SD above 5-year historical average P/E.

Source: Hong Leong Investment Bank Research - 8 Jul 2015