Results

• 1QFY16 revenue of RM320.5m was translated into core net profit of RM64.7m (+14.6% yoy, +21.9% qoq). This came in below ours and consensus expectations, which accounted for 21.6% and 23.3% of HLIB and consensus full year estimates, respectively.

Deviations

• Deviation arises as we were too bullish in our previous assumption on quantity glove to be sold in FY16 of 17.8bn pcs vs. 16.5bn pcs as per management guidance.

Dividends

• None (1QFY15: none).

Highlights

• 1QFY16 sales revenue grew on the back of higher sales volume (+15.4% yoy), which are mainly being supported by capacity expansion at NGC plant. This has partially mitigate the impact of lower ASP for both latex and nitrile (-2.9% qoq and -3.8% qoq, respectively).

• EBITDA margin has reduced from 30.9% in 1Q15 to 29.6% in 1Q16, mainly attributable to ASP reduction as well as higher maintenance and natural gas costs. However, on a QoQ basis, EBITDA margin has improved sequentially from 26.2%, thanks to better operating efficiency at NGC plant.

• Production capacity stalled at 4.1bn pcs from the current 57 lines and utilization rate has been fairly stable at 87.4%.

• Sales mix is noticed to be trending towards nitrile with the ratio of latex to nitrile of 13:87, 8:92 and 5:95 in 3Q15, 4Q15 and 1Q16, respectively. This is evident by higher revenue contribution from North America (i.e. US - from 45% in 1Q15 to 53% in 1Q16) and concurrently lower revenue contribution from Latin America (i.e. Brazil - from 6% to 2%).

• At present, there are 11 lines already commissioned at NGC while one line experienced hiccup due to testing issue. We were told that the remaining one line will start commission in 2Q16 while the rest of the lines which will be added progressively, is currently on track.

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

• We made changes in our forecasts as we trimmed our sales quantity for FY16-17. As a result, our FY16-17 EPS is reduced by 8% to 13%.

Rating

HOLD , TP: RM8.87

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 with a higher TP of RM8.87 (previously RM8.45) as we lift our P/E from 18.4x to 21.7x based on 1SD above 5-year historical average P/E.
• Our previous P/E multiple was too conservative as it was derived from 5-year historical average from 2009 to 2013, which in our view is not relevant in the current environment of stronger US$.

Source: Hong Leong Investment Bank Research - 5 Aug 2015