Results

• 2QFY16 revenue of RM379.3m translated into core net profit of RM80.4m (+59.3% yoy, +24.2% qoq). This was in line with ours but slightly above consensus expectations, which accounted for 48.3% and 52.8% of HLIB and consensus full year estimates, respectively.

Deviations

• None.

Dividends

• Declared first interim dividend of 2.0 sen per share (FY15: 3.0 sen). Entitlement date on 10 Dec 2015 and payable on 30 Dec 2015.

Highlights

• 1HFY03/15 review… The company achieved revenue of RM699.9m, an increase of 26.2% yoy, mainly due to growth in sales volume, continuous continued expansion in production capacity and stronger US$. Its core earnings improved 35.7% yoy, from RM107m in 1HFY15 to RM145.1 in 1HFY16.

• 2QFY16 review… Sales revenue grew on the back of higher sales volume (+34.8%), continuous expansion in production capacity and stronger US$.

• EBITDA margin has dropped from 27.5% in 2Q15 to 24.1% in 2Q16, mainly attributable to the recognition of fai r value loss on derivatives of RM21.05m.

• Production capacity increased to 4.8bn pcs (vs. 4.1 bn pcs in 1QFY16) from the current 61 lines with utilization rate of 85%.

• For Plant 1 and 2 at NGC, both plants will complete commissioning before end of FY16.

Risks

• Further reduction in ASP amid steep compet ition.
• 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

• Our FY16-17 core EPS forecasts are raised by 3.9%-10.4% to 18.34 sen – 23.57 sen respectively, to account for higher US$:RM assumption of RM4.00/US$.

Rating

HOLD , TP: RM5.08

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

• Maintain HOLD with a higher TP of RM5.08 (previously RM4.40) to reflect higher US$:RM assumption of RM4.00/US$.
• Our valuation is pegged to P/E of 22.8x based on 1SD above 5-year historical average P/E.

Source: Hong Leong Investment Bank Research - 6 Nov 2015