Hartalega’s 1QFY19 Core PATAMI of RM118.3m (+19.3% YoY) was within our expectation but slightly below consensus. Despite the ASP having been revised upwards (+4.4% QoQ) to reflect the foreign worker levy, higher nitrile costs and gas tariff revision in January, EBITDA margins slid by 1.6ppts (from 26%) as the velocity of the increase in nitrile cost outpaced ASP revision. Our forecast is adjusted based on model up keeping and we maintain our HOLD rating albeit with a lower TP of RM6.12.

Within expectations. 1Q19 revenue of RM706.4m (+17.5% YoY) translated into core PATAMI of RM118.3m (+19.3% YoY) which came in within at 24.1% of ours but slightly below at 23.7% of consensus full year estimates.

Dividends. No dividends were declared during the quarter.

YoY. Revenue grew 17.5% to RM706.8m on higher sales volume (+20.5%). EBITDA margin expanded by 1.9ppts to 24.4% (1Q18: 22.5%) despite ASP seeing some downward pressure (c.-2.6% YoY), offset by 12 extra lines YoY (1Q18: 81 lines vs. 1Q19: 93 lines) and lower nitrile cost on RM adjusted basis (1Q18: USDMYR 4.40 vs. 1Q19: USDMYR 3.95). Consequently core PATAMI grew by 19.3% YoY to RM118.3m.

QoQ. Revenue grew 14.5% QoQ on higher sales volume (+6.4% QoQ). Whilst the number of lines remain the same (93 lines QoQ), utilization rate increased to 92% from 89% QoQ. Despite the ASP having been revised upwards (+4.4% QoQ) to reflect the foreign worker levy, higher nitrile costs and gas tariff revision in January, EBITDA margins slid by 1.6ppts (from 26%) as the velocity of the increase in nitrile cost outpaced ASP revision. Nonetheless, core PATAMI increased by 6.7% to RM118.3.6m (from RM110.9m).

AMG. Hartalega has launched their anti-microbial gloves (AMG) in the UK beginning May. 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 this is reflective in the competitive pricing ascribed so as to encourage uptake.

Outlook. Commissioning of plant 5 (4.7bn pieces) begun in august CY18 (earlier guidance July) followed by construction of Plant 6. 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 Nitrile gloves capacity come on stream thus putting a downward pressure on ASP against a backdrop of higher nitrile cost.

Forecast. Our FY19/20/21 forecast decreases by -1.1%/-0.9%/-0.8% on model up keeping post release of FY18 annual report.

Maintain HOLD, TP: RM6.12. Post model adjustment our TP decreases to RM6.12 (from RM6.17). Our TP is 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. We reckon that our HOLD call is warranted as share price support will stem from (i) Hartalega’s inclusion into the KLCI, and (ii) sentiment driven weakness in the Ringgit will continue to whet investors’ appetite for export stocks in the near term.

Source: Hong Leong Investment Bank Research - 8 Aug 2018