Result

• Hartalega reported a net profit of RM119.3mil for its 3QFY19 results. The quarterly net profit decreased 0.7% qoq, whilst increased 6.1% yoy. Meanwhile, the Group recorded A quarterly revenue of RM723.4m, after increasing 1.3% qoq and 19.9% yoy.

• For 9MFY19, the Group attained high topline and bottomline growths of 12.3% and 10.7% respectively.

• Within expectation. The Group recorded a 9MFY19 net profit of RM364.4m, which accounted for 73.5%/71.6% of ours/market consensus’ full year estimate.

Comments

• Slightly weaker earnings qoq due lower operating profit. Lower operating profit/operating profit margin of 3.1%/0.9ppts recorded due to higher energy and maintenance cost, which offset by higher revenue and small net foreign exchange gains.

• Better earnings yoy thanks to better revenue. An increase of revenue attribute to higher average selling price in tandem with stronger demand for nitrile gloves (sales volume growth by 9.6%). However, lower PBT margin of 1.9ppts was recorded no thanks to higher interest expenses.

• Stronger 9MFY18 earnings, again due to better revenue. Growth in revenue contributed by better sales volume of 11.6% due to improving production capacity. For 9MFY19, EBIT margin increased 1.1ppts, driven by better cost efficiency.

• Dividend declared. The Group has declared a second interim dividend of 2.2 sen/ share.

• Continuous expansion to meet rising demand. Plant 5 has commissioned 6 out of 12 production lines and the remaining lines will come on progressively. Construction of Plant 6’s structure has started and the supporting facilities will follow in the 2HCY19. Plant 5 and Plant 6 have an annual capacity of 4.7 billion pieces of gloves thereafter. Also, Plant 7 will be set up with annual capacity of 2.6b pieces, to tailor small orders and specialty products. As we foresee, better revenue is recorded in these quarter, and again we expected slightly better revenue will be achieve in 4QFY19 from Plant 5.

• Gaining momentum from antimicrobial gloves (AMG).

The Group received order from over 10 countries since the launch of AMG in the UK. Besides, the Group is working on securing Federal Drug Administration (FDA) approval from the US. Moving forward, we believe the launch of AMG will contribute to a better margin for the group.

• Neutral Outlook. We believe that the Group is able to achieve higher sales volume in 4QFY19 from the commissioning of Plant 5 amid slightly better demand growth. However, a lower operating margin might be recorded due to increase of minimum wages.

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 higher sales growth from Plant 5 which offset higher minimum wages cost.

• Risks include: 1) possible oversupply of rubber gloves 2) forex losses due to forex fluctuations as the Group is unable to negotiate and pass on the costs to customer in a short span of time and 3) Lower margin due to higher fixed overhead costs as the group unable to secure FDA approval from the US.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM5.82 (previous target price: RM6.05) as we believe that current share price has fully reflected of its fundamental and has factored in positive outlook of the Group.

• Our revised target price is now pegged at 38.8x FY19F mean PE (from previous 40.3x) based on EPS of 15 sen. We ascribed lower PER (+0.5 above its means) is we expect softer industry revenue ahead.

Source: JF Apex Securities Research - 13 Feb 2019