Result

• Hartalega reported a net profit of RM124.9mil for its 1QFY19 results. The quarterly net profit increased 7.1% QoQ and 29.6% YoY. Meanwhile, the Group recorded a quarterly revenue of RM706.4m, which increased by 14.5% QoQ and 17.5% YoY.

• 1QFY19 net earnings were within our estimate and market expectation. The Group’s 3MFY19 net profit accounts for 25.2% of our full year estimate and 24.9% of market forecast.

Comments

• Better earnings QoQ. The Group reported a growth in revenue thanks to higher sales volume, +6.4%, driven by higher demand from customers along with growing production capacity. However, lower PBT margin of -1.6ppts was due to higher interest expenses, which offset higher operating profit margin of +3 ppts.

• Excellent results for YoY. The Group achieved huge growth in revenue, +17.5%, again, thanks to continuous expansion in production capacity, coupled with higher sales volume, +20.5% and higher demand in nitrile gloves. In addition, the Group achieved better operating profit and operating margin, +42.9% and +3.9ppts respectively, mainly due to lower heat cost, chemical cost, upkeep of plant and machinery and improved efficiency.

• Continuous expansion to meet rising demand. In order to meet rising demand, the Group has begun commissioning Plant 5 in August 2018 and construction of Plant 6 with an annual capacity of 4.7 billion pieces of gloves thereafter. Moreover, Plant 7 will be set up with annual capacity of 2.6b pieces, which will tailor to small orders and focus on specialty products. Therefore, we believe the sales volume could become flat in 2QFY19, and is only able to achieve better sales volume in 3QFY19 from Plant 5.

• New product launched. The Group launched its antimicrobial gloves (AMG) on 31 May 2018 in Europe and is working on securing Federal Drug Administration (FDA) approval to enter the US market. However, we only expect the antimicrobial gloves to contribute significant revenue and yield better margin to the Group in the long run due to price competition coupled with approval for US market from FDA.

• Demand for gloves remains robust. Overall, the prospects of glove sector still remain strong with the switching trend from latex gloves towards nitrile gloves which accounts for 60% of Malaysian rubber glove export.

• Positive Outlook. We believe that the Group is able to achieve higher sales volume in 2HFY19 from the commissioning of Plant 5 amid resilient demand and the launch of new anti-microbial gloves in FY19.

Earnings Outlook/Revision

• We maintain our earnings forecasts for FY19F and FY20F at RM495.9m and RM550.2m respectively. Our net profits for FY19F and FY20F represent commendable yearly earnings growth of 12.9% and 10.9% respectively as we account for: (a) higher sales growth due to Plant 5 in operation (expected to commission in August 2018, (b) better margin due to the new ERP system and (c) increasing demand arising from switching trends towards nitrile glove.

• Risks include: 1) potential hike in raw material price due to shortage of supply (eg. Latex), 2) possible oversupply of rubber gloves, and 3) forex losses as a result of forex fluctuations as the Group is unable to negotiate and pass on the costs to customer in a short span of time.

Valuation & Recommendation

• Stretched valuation. Maintain HOLD with an unchanged target price of RM6.05. Our target price is pegged at 40.3x FY19F EPS. While we continue to like Hartalega for its strong margin as compared to its peers, along with its decent sales for FY19F, we believe that current share price has fully reflected its fundamental and bright prospects.

Source: JF Apex Securities Research - 8 Aug 2018