Hartalega (HART) reported a weak set of numbers for FY19. Although net profit of RM456.2m (+3.9% yoy) is within our expectations, this fell short of consensus estimates, delivering only 98% and 93% of forecast respectively. The weak performance was mainly due to a sluggish 4Q (PAT -24% qoq, -22% yoy), as it was negatively impacted by lower sales volume and profit margins. We are maintaining our SELL call with a lower TP of RM4.10.

Profitability Takes a Hit in 4Q

EBITDA/glove (’000) ratio had taken a hit during the quarter, as it had fallen from RM24.81 in 3QFY19 to RM20.11 in 4QFY19, which was due to an increase in volatility of Ringgit during the quarter, limiting HART’s ability to pass on the higher cost to its customer. However, our checks suggest that the impact is more severe for HART relative to its peers. Nevertheless, we believe that profit margins are likely to have bottomed out, as the volatility in currency has stabilised, and the recent announcement of a rate cut by BNM might work in favour of HART and other rubber manufacturers.

Losing Some Market Share to Its Peers

HART’s plant utilisation rate contracted to 84% in 4QFY19 from 88% in 4QFY19, due to a decline in sales volume coupled with an increase in overall production capacity. Overall, sales volume has reduced by ~1% qoq, which we believe was a result of HART losing some market share to its peers. This could be due to lower price product offerings by its peers from their expanded capacity, which has managed to lure some price sensitive customers away from HART. HART is unlikely to lower its overall selling price significantly as they are still able to retain most of their customers, in our view.

Maintain SELL With a Lower TP of RM4.10

We are lowering our 12-month TP for Hartalega to RM4.10 (from RM4.20), based on a unchanged 27x FY20E PER, but keeping our SELL call unchanged. The changes are on the back of a 4.6% earnings cut for FY20- 21E, after factoring in changes to our margin forecast. The key risk to our call would stronger than expected growth in demand. A sudden sharp movement of the US$ against the RM or a sharp change in raw-material prices would also impact profitability.

Source: Affin Hwang Research - 8 May 2019