Hartalega’s 9MFY19 core PATAMI of RM367.1m (+13.7% YoY) was within ours and consensus expectations. Volumes were higher (+11.6% YoY) thanks to an additional 8 lines installed YoY (9M18:91 lines vs. 9M19: 99 lines). Utilization rates remained stable QoQ at 88% (vs. 91% 9M18). We maintain our HOLD rating and TP of RM6.12.

Within expectations. 9M19 revenue of RM2,144.0m (+19.9% YoY) translated into core PATAMI of RM367.1m (+13.7% YoY) which came in within expectations at 75.6% and 72.2% of ours and consensus’s full year estimates.

Dividends. Declared second interim dividend of 2.2 sen a share going ex on 6th of March.

QoQ. Revenue grew 1.3% QoQ on higher volumes sold (+3.0% QoQ) despite a marginally lower ASP QoQ (-2.0%). EBITDA margins improved by 0.9ppts (to 24.6%) reflective of then lower nitrile prices (c.-10% QoQ) and a stable utilization rate of 88% QoQ. Core PATAMI marginally improved by 4.1% to RM126.8m (from RM121.8m).

YoY. Revenue growth of 19.9% to RM723.4m on higher sales volume (+9.6%) and a higher ASP (+10.0% YoY). EBITDA margin declined by 1.4ppts to 24.6% (3Q18: 26.0%) on the back of higher energy, nitrile prices (c. +11% YoY) and labour costs. Despite this, demand for gloves remains robust, translating to a core PATAMI growth of 17.5% YoY (from RM108.0m).

YTD. Revenue grew 19.9% YoY on the back of higher volumes (+11.6% YoY) thanks to an additional 8 lines installed YoY (9M18: 91 lines vs. 9M19: 99 lines) and a higher ASP (+6.4%) whilst utilization rate was flattish at 90% (vs.91%). Consequently, EBITDA grew 11.1% YoY to RM512m, despite higher nitrile costs of c. +13% YoY. Core PATAMI grew by 13.7% YoY in tandem with topline 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 CY19. On that note, plant 5 of the NGC is coming along nicely with the group having commissioned 6 of 12 lines as at 3Q19, at a rate of 2 lines per month in line with guidance. However, in an effort to moderate the pressures of overcapacity, we understand that the remaining 6 lines will be commissioned at a rate of 1 line per month moving forward.

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 (1SD above Hartalega’s 3 year historical PER). Valuations have come off recently, with the stock now hovering above its 3-year historical forward PER mean of 30x. Despite this, we remain cautious on (i) the strengthening outlook of the MYR and (ii) ASP pressure for the Nitirle glove segment in CY19, thus we maintain our HOLD call.

Source: Hong Leong Investment Bank Research - 13 Feb 2019