Becoming More Upbeat

We recently hosted an investor luncheon with Hartalega post the company’s strong 4Q17 results. Similar to Hartalega, we remain upbeat on the glove sector, as we believe strong sales growth and improving efficiencies should underpin continued earnings growth. The stronger Ringgit could throw a spanner into the works, but robust glove demand should negate currency headwinds. We increase our FY18-20 earnings forecasts after imputing firmer sales growth and higher efficiency gains. We raise our 12M TP to RM6.70 from RM6.30, on an unchanged 24x our revised CY18E EPS. BUY.

Strong Quarter to Close FY17

Hartalega delivered strong 4Q17 results to close FY17 on a high note. 4Q revenue grew by 16% qoq on higher volume while PAT grew sharply by 35% qoq to RM89.4m on margin improvement. 4Q PAT would have been stronger if not for the additional deferred tax incurred, which led to a 9ppts qoq increase in the effective tax rate. Operationally, the EBITDA margin improved 5ppts qoq to 26% on lower labour costs and overhead.

Efficiency-driven Improvement

Management said that, despite increases in raw material and utilities costs in general, the margin improvement was predominantly driven by higher efficiencies delivered by NGC, as well as effects from higher operating leverage. Glove demand remains robust, and Hartalega continues to make inroads into underserved markets like Eastern Europe and China, aided by increasing healthcare awareness and regulatory requirements.

Ongoing Capacity Expansion

We understand that 10 out of the planned 12 lines have been installed at the NGC Plant 3 to date, and Plant 4 should be fully commissioned by 2017. This should expand Hartalega’s capacity to 27bn, implying a 23% yoy increase. Utilisation rates should also hover around 90% in FY18.

Raising TP to RM6.70

We increase our FY18-20 earnings estimates by 1-6%, after imputing for stronger sales growth and higher efficiency gains. Despite premium valuations, we expect PERs to narrow fairly quickly on strong earnings growth in FY18-20. Hartalega’s superior operational efficiencies should sustain above-average operating margins. We raise our 12M TP to RM6.70 from RM6.30, pegging it to an unchanged 24x our revised CY18E EPS. Maintain BUY.

Source: Affin Hwang Research - 24 May 2017