Result

• Hartalega reported a net profit of RM113.3mil for its 2QFY18. The quarterly net profit improved by 17.6% q-o-q and surged strongly by 159.2% y-o-y. Meanwhile, the Group recorded quarterly revenue of RM584.6mil, declining by 2.7% q-o-q but increased 33.8% y-o-y.

• For 6MFY18, the Group attained a higher top line and bottom line of 41.4% and 64.6% y-o-y respectively.

• 1HFY18 net earnings within market expectation but higher than ours. The Group’s 6MFY18 net profit of RM209.7mil was within consensus by accounting for 53% of market forecast and above ours of 57% of full year estimate.

Comments

• Better earnings q-o-q. The Group reported a higher operating profit margin, +4.2ppts in 2QFY18 as compared to 1QFY18. The improvement was due success of cost management program, continuous effort in automation to reduce manual workforce, high utilization rate and ability to pass on cost and fair pricing.

• However, the q-o-q decrease in revenue for 2QFY18 was due to a more competitive pricing resulted in lower ASP from the reduced raw material cost, coupled with stronger MYR against USD.

• Stronger earnings y-o-y. As compared to 2QFY17, the revenue was higher in 2QFY18, representing an increase of 33.8%. The increase was mainly due to strengthening of USD and increase in sales volume by 30.2%. In addition, the Group recorded a higher PBT margin, +4.6ppts, thanks to net forex gains of RM7.8mil against a net loss of RM4.4mil in 2QFY17.

• Higher 1HFY18 earnings attributable to expansion in production capacity and stronger demand. The Group’s 1HFY18 revenue increased by 41.4% to RM1185.7mil from RM838.8mil in 1HFY17 due to the volume surge by 32.1%, higher average selling price and strengthening of USD.

• Dividend declared. The Group has declared a first interim dividend of 3.5 sen/share.

• Expansion to meet rising demand. Overall, the outlook of rubber glove sector remains strong with the increasing demand of nitrile gloves. The construction of Plant 5 is ongoing, currently at the pilling stage and will be completed by 2HFY18.

• Widening geographical outreach. The supply disruption in China with banning on coal-fired glove production due to environmental concern also spike up the demand for the Group’s products. Currently, the Group is aggressively penetrating new markets in Europe and Asia.

Earnings Outlook/Revision

• We adjust upward of our earnings forecast for FY18F by 9.1% as we account for higher sales due to construction of plant 5 and additional growth stemming from the switching of demand from China to Malaysia on its nitrile gloves.

Valuation & Recommendation

• Upgraded to BUY from HOLD with a higher target price of RM9.18 (previous target price: RM7.27) following our earnings upgrade and applying higher PER. Our target price is now pegged at 34x FY19F PE (+1sd above 3-year mean) based on EPS of 27 sen.

Source: JF Apex Securities Research - 8 Nov 2017