Results

• Within: 1H18 PATAMI of RM209.6m (+64.7% yoy) accounted for 54.3% and 53.2% of ours and consensus full year estimates, respectively.

Dividends

• Declared first interim dividend of 3.5 sen/share representing a pay out of 27%.

Highlights

• Yoy: Revenue grew 33.8% to RM584.6m, on the back of higher quantity sales (c. +30.2%) on an enlarged production capacity (2Q18: 85 lines vs. 2Q17: 69 lines), higher ASP (c.+1% yoy) and greater operational efficiencies. Subsequently, PATAMI grew 59.2% yoy on the above mentioned factors whilst EBITDA margins expanded by 3.6ppts (2Q17: 22.9% vs. 2Q18: 26.6%).
• Qoq: Revenue declined 2.7% despite higher sales volume (c. +5.2%) arising from competitive pricing (c.-1% qoq). Despite this, PATAMI grew by 17.6% to RM113.2m qoq due to lower raw materials and chemical costs as well as greater efficiencies in the production process. EBITDA margins expanded by 4.1ppts to 26.6% qoq (1Q18: 22.5%).
• Sales from Europe (south and eastern) grew 3.2% qoq to 24.1% of total sales as the group embarked on a more diversified customer base strategy (previous focus: North America market). This is also evident by the growth exhibited in Asia Pacific which grew 3.5% qoq.
• Hartalega is a beneficiary of the environmental purge in China, which has seen the China market switching towards nitrile gloves. We believe that Hartalega is the prime beneficiary due to its skew towards the production of Nitrile gloves, which are lighter than NR latex gloves (nit rile 2.8 grams vs. NR latex 4.0 grams) thus resulting in cheaper pricing. We understand that the China market is more receptive towards switching to Nitrile from PVC given their preference for synthetic products.
• Production capacity rose to c.28bn pcs in 1H18 (1H17: c.25bn pcs) with the current 85 lines having a utilization rate of 92% (+1ppts qoq :+4ppts yoy)

Risks

• Key risks include a further surge in nitrile and latex prices, inability to sell off enlarged capacity culminating in ASP competition and a sharp appreciation of MYR vs USD.

Forecasts

• We raise our FY18-20 forecasts by 5.8% as we impute a higher utilization rate of 92% from 87%.

Rating

• We like Hartalega for its leadership posit ion in the nitrile segment and strong fundamentals. However, we believe the stock reflects these fundamentals at current prices and the shadow of the demising ringgit catalyst could halt further impressive gains this year. As such we maintain our HOLD call.

Valuation

• Raise our TP to RM7.45 (from RM7.04) based on CY18 EPS pegged to PER of 26x. Our ascribed PER of 26x is in line with Hartalega’s 5 year PER historical mean (see figure #5).

Source: Hong Leong Investment Bank Research - 08 Nov 2017