Hartalega’s 1HFY19 core PATAMI of RM240.2m (+13.2% YoY) was within our expectation but slightly below consensus. Volumes were higher (+15.4% YoY) thanks to an additional 9 lines installed YoY (1H18:85 lines vs. 1H19: 94 lines) whilst utilization rate dropped c.90% (from 92% in 1H18) on stiffer competition. We maintain our forecast and HOLD rating with TP of RM6.12.

Within expectations. 1H19 revenue of RM1,420.6m (+19.8% YoY) translated into core PATAMI of RM240.2m (+13.2% YoY) which came in within ours at 49.5% but slightly below at 47.4% of consensus full year estimates.

Dividends. Declared first interim dividend of 2.2sen a share going ex on 5th of December.

QoQ. Revenue grew 1.1% QoQ despite lower volumes (-3.5% QoQ) thanks to a higher ASP QoQ (+4.8%). Consequently, EBITDA margins slid by 0.7ppts (from 24.4%) reflective of a higher nitrile cost (c. +3%) and lower utilization rate of 88% (vs.92% QoQ) due to stiffer competition. Core PATAMI marginally increases to 3.0% to RM121.8m (from RM118.3m) due to forex.

YoY. Revenue grew 22.2% to RM714.2m on higher sales volume (+10.6%) and a higher ASP (+10.8% YoY). EBITDA margin declined by 2.9ppts to 23.7% (2Q18: 26.6%) on the back of higher energy, raw materials (c. +30% YoY) and labour costs in addition to a stronger RM YoY (2Q18: USDMYR 4.30 vs. 2Q19: USDMYR 4.1). Despite this, demand for gloves remains robust, translating to a core PATAMI growth of 12.7% YoY to RM121.8m.

YTD. Revenue grew 19.8% YoY on the back of higher volumes (+15.4% YoY) thanks to an additional 9 lines installed YoY (1H18:85 lines vs. 1H19: 94 lines) and a higher ASP (+4.2%).Consequently, EBITDA grew 14.5% YoY despite higher nitrile costs of c.+20% YoY. Core PATAMI grew by 13.2% YoY in tandem with EBITDA growth.

Outlook. We continue to 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 downward pressure on ASP in FY19.

Forecast. Unchanged as the results were within expectations.

Maintain HOLD, TP: RM6.12. 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. Despite the rich valuation, we reckon that our HOLD call is warranted as share price support will stem from (i) Hartalega being a KLCI stock and (ii) stronger USD outlook will continue to maintain robust demand for export stocks.

Source: Hong Leong Investment Bank Research - 9 Nov 2018