Hartalega’s 1Q20 core PATAMI of RM96.1m (-18.9% YoY) was below ours and consensus expectations. The deviation was due to (i) lower sales volumes (-9.2%% YoY), (ii) higher operational costs and (iii) a higher effective tax rate (19.6% vs. 14.2% YoY). We cut FY20-21 numbers by 13.2%-8.2% as we account for lower utilization rates and introduce FY22 numbers. We maintain our HOLD call with lower TP of RM4.78 based on CY19 EPS pegged to PE of 33.7x (0.5SD above 3 year mean historical PE).

Below expectations. 1Q20 revenue of RM640.1m (-9.4% YoY, -6.4% QoQ) translated into core PATAMI of RM96.1m (-18.9% YoY, +7.4% QoQ) which came in below ours (17.7%) and consensus (18.5%) estimates. The results came in below expectations due to (i) lower sales volumes (-9.2% YoY, -7.9% QoQ), (ii) higher operational costs (labour, gas, electricity & packaging) and (iii) a higher effective tax rate (14.2% in 1Q19 vs. 22.5% in 1Q20).

QoQ. Revenue declined -6.4% QoQ from RM683.9m due to lower volumes sold (- 7.9% QoQ) partially offset by a marginal increase in ASP QoQ (+1.2 %). The lower volumes sold was a result of the decommissioning of 5 lines from Bestari Jaya partially offset by the commissioning of 2 lines from Plant 5 (NGC) resulting in a net position of 100 lines vs. 103 lines in 4Q19. EBITDA improved by +8.0 % to RM154.7m whilst EBITDA margins improved by 3.2ppts (to 24.2%). This was mainly attributed to better cost management, namely lower upkeep and packaging costs, and to a lesser extent, the ASP revision. Subsequently, core PATAMI improved to RM96.1m (from RM89.5m) despite the higher effective tax rates QoQ (22.5% vs. 19.6%) due to tax planning.

YoY. Revenue slipped -9.4% from RM706.4m on lower sales volume (-9.2%) and marginally lower ASP (-0.2% YoY). Utilization rates have also dropped from 92% in 1Q19 to 76% in 1Q20; we believe a reflection of the tough landscape in the nitrile glove segment. Subsequently, EBITDA declined by -10.2% mirroring the trajectory of the topline and higher packaging, electricity, gas and labour costs. Despite this EBITDA margins declined by only 0.2ppts (1Q19: 24.4%) on the back of better overall cost management. Core PATAMI declined by -18.9% YoY (from RM118.5m) compounded by the lower tax base of 14.2% in 1Q19 vs. 22.5% in 1Q20.

Outlook. We continue to expect the challenges within the Nitrile segment in CY19 and it will be a few quarters before capacity 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 have a positive effect on the share price.

Forecast. We cut FY20-21 numbers by 13.2%-8.2% as we account for lower utilization rates moving forward. We introduce our FY22 numbers.

Maintain HOLD, TP: RM4.78. We our HOLD and a lower TP of RM4.78 based on CY19 EPS pegged to PE of 33.7x (0.5SD above 3 year mean historical PE).

Source: Hong Leong Investment Bank Research - 7 Aug 2019