Hartalega (HART) reported FY18 PATAMI of RM439m (+55% yoy), within our and consensus expectations and delivering 101% and 102% of the respective forecasts. Although the profitability (per glove) in 4Q FY18 was negatively impacted by an appreciation of the RM, a lower effective tax rate helped to mitigate this. Going forward, we believe the company will be able to pass on the adverse currency impact on the back of the robust glove demand. Hence, we are keeping our HOLD call and unchanged RM5.55 target price.

Currency Volatility Makes Pricing Challenging

Despite a 5% increase in available capacity in 4Q FY18, EBIT was down 2.8% qoq, due to margin contraction during the quarter. We believe that the contraction was mainly due to an unfavourable US$/RM as the RM strengthened from RM4.04 to RM3.86/US$, and Harta was unable to fully hedge its exposure. Management expects the company should, however, be able to pass on the impact of the currency going forward, as it has already passed on the higher natural gas cost, which is an indication that demand will remain robust, in our view.

No Delay to the New Capacity

Based on the current expansion schedule, Hartalega will be adding around 5bn pcs (+15-18%) of new capacity for the next 2 years to meet current demand. As Harta is currently operating at around a 90% utilisation rate, we believe that the new capacity will be earnings-accretive. With the new capacity coming on stream, we believe that Harta will continue to benefit from a lower effective tax rate of around 17-19% due to tax incentives related to its capex for the new plants.

Maintain HOLD With An Unchanged TP of RM5.55

We are maintaining our 12-month TP for Hartalega at RM5.55 (pre bonus issuance RM11.10), based on an unchanged 31x PER on FY20E. We keep our HOLD rating as we believe the stock is fairly valued, trading at around +2SD its historical average PER. Supermax (SUCB MK, RM3.13, BUY) and Top Glove (TOPG MK, RM10.12, BUY) remain our preferred sector picks. The key risk to our call would be management’s inability to ramp up the utilisation rate of the new capacity.

Source: Affin Hwang Research - 16 May 2018