Results

Deviations

• Below expectations due to higher operational costs.

Dividends

• Declared second interim dividend of 2.0 sen per share (3QFY15: 3.0 sen). Ex-date on 8 Mar 2016 and Entitlement date on 10 Mar 2016.

Highlights

• 3QFY03/16 review… The company achieved revenue of RM398m, an increase of 39% yoy and 4.9% qoq, mainly due to increase in demand, continued expansion in production capacity and stronger US$. However, its core net earnings decreased 2.3% yoy and 37.3% qoq, after one-off adjustment of fair value gain on derivatives of RM29.2m.

• 3QFY16 sales growth has partially mitigated the impact of lower ASP for both latex and nitrile (-8.1% qoq and -7.2% qoq, respectively). EBITDA margin reduced from 28.7% in 9MFY16 to 26.9% in 9MFY15, mainly attributable to lower ASP arising from lower nitrile material prices and more competitive sales pricing.

• Production capacity rose to 5.05bn pcs (2QFY16: 4.82 bn pcs) from the current 64 lines with utilization rate of 81%.

• The ratio of latex to nitrile was 7:93 in 3QFY16 (5:95 in 2QFY16). Revenue contribution from North America and Europe/Scandinavia declined to 44.5% and 32.5% (2QFY16: 45% and 35.3% respectively).

• Up to Dec 2015, 19 lines were already commissioned at NGC. Guidance is for other lines to come in at slower pace.

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 tweaked our production cost assumption higher to reflect the higher operational costs.

• We note that the strong USD catalyst may diminish in 2H16 as ringgit is poised to maintain its strength given resilient economic fundamental. We trim our ringgit assumption to RM3.80/US$ in our FY17 and FY18 forecasts (vs. RM4.00/US$ previously).

Rating

HOLD , TP: RM5.32

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 lower TP of RM5.32 (previously RM6.47) post earnings forecast adjustments, based on an unchanged P/E multiple of 28.5x CY17 EPS, +1SD above 5- year historical average P/E.