Results

• Above expectations: 9M18 PATAMI of RM322.6m (+66.7% yoy) accounted for 79% and 75% of ours and consensus full year estimates, respectively.

Dividends

• Declared second interim dividend of 4 sen/share (YTD: 7.5 sen/share) representing a pay-out of 38%.

Highlights

• YTD: Revenue grew 38.1% to RM1.78bn on the back increased sales volume (+c.33.5% yoy), higher ASP and greater operational efficiencies. Subsequently, PATAMI grew 66.7% yoy to RM322.6m on the above mentioned factors whilst EBITDA margins expanded by 4.0ppts (9M17: 21.8% vs. 9M18: 25.8%).

• Qoq: Revenue grew 3.2% on higher sales volume (+c.4%). Nonetheless PATAMI declined marginally by -0.3% to RM1132.8m qoq arising from what we suspect to be more competitive pricing. Consequently, EBITDA margins declined by 0.6ppts to 26.0% qoq (2Q18: 26.6%).

• We understand that demand will remain robust throughout 2018 on the back of the environmental purge in China which is affecting its vinyl glove producers, whom are still facing difficulties conforming to the new stricter laws. This phenomenon should continue to support the higher utilization rates in 2018.

• Production capacity rose to c.28.4bn pcs in 9M18 with the current 89 lines having a utilization rate of 91%.

• Hartalega aims to launch their anti-microbial gloves in Europe by 2QCY18 whilst simultaneously being in the midst of securing FDA approval for the US market.

• Bonus issue: In another announcement Hartalega proposed a bonus issue of 1:1 to be completed in 1QCY18. Fundamentally, we are neutral on this announcement, however we do expect a liquidity boost to eventuate from this exercise. Post bonus issue we expect the share based to increase to 3.43bn shares from 1.643bn shares. Our ex TP will be adjusted to RM5.35.

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 forecasts by 3.8% as we adjust our effective tax rate downward from -21% to -18%. For prudence sake we maintain our effective tax rates assumption for FY19-20.

Rating

• We like Hartalega for its leadership position 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

• Maintain TP of RM10.70 based on CY19 EPS pegged to PER of 31.8x. Our ascribed PER of 31.8x is in line with Hartalega’s 5 year PER historical mean.

Source: Hong Leong Investment Bank Research - 7 Feb 2018