Result

• Hartalega reported a net profit of RM112.5.3mil for its 3QFY18 results. The quarterly net profit was flat, -0.8% QoQ and improved by +69.9% YoY. Meanwhile, the Group recorded quarterly revenue of RM603.1mil, which increased by 3.2% QoQ and 32.2% YoY.

• For 9MFY18, the Group attained a higher top line and bottom line of 38.1% and 66.4% YoY respectively.

• 9FY18 net earnings within our and market expectation.

The Group’s 9MFY18 net profit of RM322.5mil accounts for 79.8% of our full year estimate and 75.4% of market forecast.

Comments

• Slightly lower earnings QoQ. The Group reported higher revenue of RM603.1m in current quarter compared to RM584.6m in preceding quarter. The increase in revenue was mainly due to higher sales of 4.0%. However, the Group reported a lower PAT margin, -0.5ppts in 3QFY18 compared to 2QFY18 due to higher tax expense.

• Stronger earnings YoY. As compared to 3QFY17, the revenue was higher in 3QFY18, representing an increase of 32.2%, mainly thanks to increase in sales volume of 36.2%. In addition, the Group recorded a higher PBT margin of +5.9ppts, driven by foreign exchange gain of RM6.9m against net loss of RM30.3m in 3QFY17.

• Higher earnings for 9MFY18. The continuous expansion in production capacity along with the increase in sales volume by 33.5% are the main factors contributed to higher revenue of +38.1%. Moreover, the increases in PBT margin of +4.1ppts compared to 9MFY17 was due to foreign exchange gain.

• Dividend declared. The Group has declared a second interim dividend of 4.0 sen/share.

• Proposed bonus issue. The Group has proposed a bonus issue of 1 bonus share for every 1 existing share with the with the entitlement date to be determined later. This is to reward shareholders and improve its share liquidity.

• Demand for gloves remains robust. Overall, the prospect of glove sector still remains strong with the switching of demand towards nitrile gloves. Moreover, the Group will continue to benefit from supply shortage in China as vinyl glove producers still face difficulties in conforming strict environmental law in China.

• Continuous expansion to meet rising demand. Currently, the Group has commissioned 10 production lines out of total 12 production lines. Likewise, the construction of plant 5 is still ongoing and expected to be completed by 2HCY18 to meet

prevailing rising demand.

• Product expansion. The Group aims to launch its new product, anti-microbial gloves in Europe by the second quarter of 2018. It is working on securing Federal Drug Administration (FDA) approval to enter the US market.

• Positive Outlook. We strongly believe that the Group is able to achieve higher sales volume and margin in FY19 attributable to China market and the launch of new anti microbial gloves in FY19. However, we foresee that the earnings in the next quarter, i.e. 4QFY18 will be flattish due to lower margin and FOREX loss from the sudden strengthening of MYR against US dollar which is unable to pass on to customer in a short period of time.

• Risks include strengthening of MYR against US dollar which would affect the earnings of the Group.

Earnings Outlook/Revision

• We maintain our earnings forecasts for FY18F whilst upgrade our net earnings for FY19F by 15% as we account for higher sales growth due to the launch of anti bacteria glove during second half of 2018 and stronger demand following China’s district enforcement against polluting industries.

Valuation & Recommendation

• Downgrade to HOLD from BUY with a higher target price of RM11.47 (previous target price: RM9.18) following our earnings upgrade in FY19F. We believe that current share price has fully reflected its strong fundamental and the positive outlook of the Group.

• Our revised target price is now pegged at 37.3x FY19F forward PE (from previous 24.6x) based on EPS of 30 sen. We ascribed higher PER (+2 SD above its mean) on Hartalega is to better reflect the Group’s strong margin ahead along with its strong demand from the launch of anti-bacteria glove in FY19F.

Source: JF Apex Securities Research - 7 Feb 2018