Result

• Hartalega reported a headline net profit of RM66.4mil for its 3QFY17. The quarterly net profit dropped 6.7% q-o-q and 8.8% y o-y. Meanwhile, topline rose 4.4% q-o-q and 14.6% y-o-y to RM456.3mil.

• For cumulative 9MFY17, net profit of RM193.8mil was 0.3% lower than a year ago, while topline grew by 6.3% y-o-y.

• Core net earnings above expectations. The Group’s 9MFY17 core net profit of RM232mil (after excluding unrealised forex gain/loss and fair value gain/loss of derivatives) was above expectations by accounting for 79.9% and 82.2% of our and consensus full year estimates respectively.

Comments

• Headline earnings affected by non-operating items. The reported net profits for 3QFY17 declined by 6.7% q-o-q and 8.8% y o-y mainly impacted by recognition of unrealised foreign exchange loss as well as the fair value of foreign exchange forward contracts entered in view of the lock in rate of the hedging contract was lower than the spot rate.

• Higher ASP for the latest quarter. The Group’s 3QFY17 core net earnings jumped by 18.1% y-o-y and 85.8% q-o-q to RM88.5mil due to the increase in average selling prices (ASP) during 3QFY17, predominantly on higher raw material price, i.e. NBR. Thus, core net earnings for 9MFY17 also surged by 30.6% y-o-y.

• Continuous expansion led to higher sales volume. The Group’s topline rose 4.4% q-o-q and 14.6% y-o-y contributed by higher sales volume in line with the continuous expansion in production capacity and increase in demand. The Group believes that the demand for rubber gloves remain strong and will continue to expand in sustained pace.

• Higher raw material prices. The Group’s operating profit shrank by 6.3% q-o-q owing to the fact that operating cost increased with the hike of NBR. Although the Group has increased its ASP in order to pass on the higher costs, it is still not adequately cover the cost due to time lag. Thus, the operating profit narrowed by 2.0ppts.

• Dividend declared. In line with the Group’s commitment to reward shareholders, the Board has declared a second single-tier interim dividend of 2 sen per share for its financial year FY17 with payable on 29 March 2017.

Earnings Outlook/Revision

• We maintain our earnings forecast for FY17F while slightly nudged down our earnings forecast for FY18F by 2% to account for the higher-than-expected raw material cost.

Valuation & Recommendation

• Maintain HOLD for Hartalega with a higher target price of RM4.90 (previous TP RM4.60) after we rolled over our valuation to FY18F. Our target price is pegged at 25x FY18F EPS, which is close to its historical 3-year mean PE. Although the Group could benefit from the higher USD against MYR and on-going expansion plans, we believe the elevated NBR will whittle the positive factors

Source: JF Apex Securities Research - 15 Feb 2017