Hartalega’s FY19 core PATAMI of RM456.6m (+14.7% YoY) was within ours but below consensus expectations. Volumes were higher (+10.3% YoY) thanks to an additional 10 lines installed YoY (FY18: 93 lines vs. FY19: 103 lines). We expect the consequential quarters to improve as the increases in costs and forex swing are passed through. We expect the softer RM sentiment moving forward to support share price. We downgrade our call to HOLD (from Buy) given the share price has performed since our previous upgrade. Maintain TP of RM5.33 - CY19 EPS pegged to PE of 33.7x (0.5SD above 3 year mean historical PE).

Within expectations. FY19 revenue of RM2827.9m (+17.6% YoY) translated into core PATAMI of RM456.6m (+14.7% YoY) which came in within ours at 98.4%, but below consensus at 86.7% of full year estimates.

Dividends. Declared second interim dividend of 1.9sen a share (YTD: 6.3 sen) going ex on 11th of June.

QoQ. Revenue declined -5.5% QoQ to RM683.9m due to marginally lower volumes sold (-0.8% QoQ) and ASP QoQ (-4.0%). EBITDA declined by -19.6% to RM143.2m whilst EBITDA margins narrowed by 3.7ppts (to 20.9%). This was mainly attributed to the sharp strengthening of the RM (USD-MYR -2% QoQ) and to a lesser extent higher labour costs and the inability to pass on the cost increases timely. Core PATAMI deteriorated to RM89.5m (from RM126.8m).

YoY. Revenue grew 10.9% from RM616.8m on higher sales volume (+5.0%) and higher ASP (+6.1% YoY). EBITDA declined by -10.8% whilst EBITDA margin declined by 4.1ppts (4Q18: 26.0%) on the back of higher energy, labour costs (+10%) and the sharp strengthening of the MYR. We expect the higher costs to be passed through moving forward albeit with a more inert velocity given the sectoral headwinds. Subsequently, core PATAMI declined by 19.3% YoY (from RM110.9m).

YTD. Revenue grew 17.6% YoY on the back of higher volumes (+10.3% YoY) thanks to an additional 10 lines installed YoY (FY18: 93 lines vs. FY19: 103 lines) and higher ASP (+6.3%). Utilization rate declined to 88% (vs. 91%) on the additional lines installed. EBITDA grew 6.6% YoY to RM662.9m on the above mentioned sectoral headwinds and lag in passing on the sharp cost increases. Despite this, core PATAMI grew by 14.7% YoY in tandem with topline growth.

Outlook. We continue to expect the challenges within the Nitrile segment in CY19 and it will be a few quarters before capacity growth and demand growth match up. Nonetheless, we take solace in the fact that the sector is prolonging its capacity installation and commissioning. We expect the softer RM sentiment moving forward to support the share price.

Forecast. Unchanged as the results were within expectations.

Downgrade to HOLD, TP: RM5.33. We downgrade our call to HOLD (from Buy) given the share price has performed since our BUY call (+6.8% since our upgrade on 18th April 2019) and as the upside narrows. Maintain TP of RM5.33 - CY19 EPS pegged to PE of 33.7x (0.5SD above 3 year mean historical PE).

Source: Hong Leong Investment Bank Research - 8 May 2019