Hartalega’s FY18 Core PATAMI of RM399.0m (+23.2% yoy) was below our expectation and consensus. Production capacity rose to 28.5bn with a utilization rate of 91% in FY18. Our forecast is unchanged and we maintain our HOLD rating albeit with a higher TP of RM6.17. We expect the share price will be supported by (i) it’s possible inclusion into the KLCI come June review (ii) sentiment driven weakness in the Ringgit will continue to whet investors’ appetite for export stocks.

Below expectations. FY18 core PATAMI of RM399.0m (+23.2% yoy) came in below at 94% and 92.4% of ours and consensus full year estimates, respectively. The lower than expected results were due to higher (i) energy costs (natural gas) (ii) butadiene prices and (iii) finance costs.

Dividends. Declared a third interim dividend of 2 sen/share (FY17: 8 sen/share).

YTD. Revenue grew 32.1% yoy to RM2.41bn on the back increased sales volume (+33% yoy), greater operational efficiencies and a higher utilization rate (FY18: 91% vs. FY17: 87%). EBITDA margins expanded by 2.8ppts (FY17: 23% vs. FY18: 25.8%). Subsequently, core PATAMI grew 23.2% yoy to RM398.0m on the above mentioned factors.

Yoy. Revenue grew 17.0% to RM616.8m on higher sales volume (+30.1%). EBITDA margin declined marginally by 0.2ppts to 26% as ASP saw downward pressure, offset by 17 extra lines yoy (4Q18:93 lines vs. 4Q17: 76 lines). Consequently core PATAMI grew by 10.3% yoy to RM98.6m.

Qoq. Revenue grew 2.3% qoq on higher sales volume (+5% qoq). Core PATAMI declined by 7.1% to RM98.6m qoq on competitive pricing whilst utilization rate declined to 89% from 91% qoq.

AMG. Production capacity rose to c.28.5bn pcs in FY18 with the current 93 lines having a utilization rate of 91%. Hartalega will launch their anti-microbial gloves (AMG) in Europe later this month, whilst simultaneously being in the midst of securing FDA approval for the US market. We are of the view that it will take some time for Hartalega to secure orders for its AMG given the products infancy in the market.

Outlook. Commissioning of plant 5 (4.7bn pieces) will commence in June CY18 followed by construction of Plant 6. Hartalega also announced its plans for Plant 7 which has been earmarked for specialty products with a capacity of c.2.6bn pieces. Moving forward we expect utilization rate to remain stable at c.89%-91% on the back of robust global demand, however we may see margin deterioration as more gloves capacity come on stream thus putting a downward pressure on ASP.

Forecast. Unchanged as the results were only marginally below expectations.

Maintain HOLD, TP: RM6.17. Despite the marginal results shortfall, we reckon there are short term sentiment driven factors that may warrant share price support (or even possible upside). These include: (i) possible inclusion into the KLCI come June review (ii) sentiment driven weakness in the Ringgit will continue to whet investors’ appetite for export stocks in the near term. Given such, we adjust our TP upwards to RM6.17 based on CY19 EPS pegged to PER of 37x (from 31.8x). Our ascribed PER of 37x represents 1SD above Hartalega’s 3 year historical PER.

Source: Hong Leong Investment Bank Research - 16 May 2018