Hartalega (HART) posted another good set of numbers, as net profit for 1HFY18 grew by 65% yoy to RM210m. Results were, however, in line with our and consensus expectations, constituting 49% and 53% of respective forecasts. The strong performance was driven by both higher sales volume and better GP margin for its nitrile gloves. We believe that the current earnings momentum is sustainable as additional production lines are expected to come on stream progressively with the completion of Plant 4 in NGC. Despite the strong performance, we are maintaining our HOLD call on the stock, as we believe that the shares are fairly valued.

Earnings Momentum to Continue

The earnings momentum for Hartalega is expected to continue, as management has indicated that the progress of Plant 4 is on track, and they are now working towards commissioning production in Plant 5 by end of CY18. Although the new lines of these plants will come in phases, the completion of Plant 4 and Plant 5 will increase its current production capacity by 15-20% p.a. over the next 3 years. Demand for rubber gloves remains robust, as the current utilisation for Hartalega remains above 90%.

But Margin Likely to Face Headwinds

Although margin has improved during the quarter, we believe that there are a few headwinds that could provide downside risk to our margin expectation. The recent rally in oil prices will likely have an impact on Nitrile Butadiene prices, which is the main raw material for production and it constitutes 35-40% of overall operating expenses. As gloves are mainly sold in US$, the strengthening of the RM will also have a negative impact on its profitability - we are expecting the RM/US$ to strengthen to 4.10 by year-end from the current 4.23.

Maintain HOLD on Valuation; TP Maintained at RM7.20

Given that the results are in line with our expectations, we are keeping our earnings forecast unchanged. We are also maintaining our HOLD call on the stock, with an unchanged TP at RM7.20, as we believe that stock is fairly valued at 27x FY19E PER.

Source: Affin Hwang Research - 8 Nov 2017