Result

• Hartalega reported a net profit of RM103.8mil for its 2QFY20 results. The quarterly net profit increased 10.4% QoQ but decreased 13.7% YoY. Meanwhile, the quarterly revenue stood at RM709.4m, rising 10.8% QoQ but falling marginally by 0.7% YoY.

• Below consensus and in-house projection. Overall, 1HFY20 net profit accounts for RM198m or 44.0%/43.0% of ours/market full-year estimates.

Comments

• Better QoQ performance. The Group’s revenue increased by 10.8% QoQ due to higher sales volume for the quarter. The higher QoQ sales volume resulted in increase of PBT by 12.9%. Furthermore, the Group was able to maintain stable PBT margin of 19.4% during this quarter against 19.0% in the preceding quarter.

• Weaker YoY performance. Meanwhile, the Group’s revenue slid by 0.7% whilst PBT declined by 3.5% in tandem with lower average selling price and higher cost of natural gas for the quarter. We opine that the stiff competition and ample supply of nitrile gloves by competitors caused the Group to cut down selling price in order to protect market share. Likewise, the above mentioned reasons also dragged down the 1HFY20 net profit by 19.2%.

• Slowing demand has sign of relenting. Hartalega ramped up the utilization rate from 76% in 1Q2020 to 85% in 2Q2020 indicates that the Group is coming back from the trough. Better demand for glove is underpinned by healthcare which is deemed non-cyclical industry, positive Sino-US trade war progression and interest rate cuts from global central banks.

• Expansion plan is on track. Hartalega’s expansion plan is not standstill at this junction despite slowing demand for the products. Plant 6 targets to commission its 1st line in 1Q CY2020 and construction of Plant 7 has commenced and targets to commission its 1st line in 2HCY2020. Moving forward, we will see more diversified product mix by the Group in plant 7, catering to small orders and focusing more on specialty product, and will have an annual installed capacity of 3.4 billion pieces.

• Stand out from biggest competitor. We believe glove industry is still in a fast growing stage but the disruption of macro headwinds halted Hartalega’s performance for a while. The Group is expected to benefit from the suspension of Generalized System of Preferences (GSP) to Thailand starting April 2020 with estimate RM800m value of gloves will be charged higher tariff upon exporting to the US. Moreover, the

outlook of Thai export is challenging with the appreciation of Thai Baht against USD (YTD: +7%). The situation is likely to prolong which would exacerbate Thai export to the US in coming years. Hence, the gloomy outlook for Thai glove exports will indirectly benefit Malaysia which is the current largest glove exporting nation in the world.

Earnings Outlook/Revision

• We decrease our FY20F net earnings forecast by 2.5% to RM444.7m for FY20F by lowering the utilization rate. However, we increase our FY21F net profit forecast by +1.3% to RM450.5m as we lift the sales volume given better demand.

Valuation & Recommendation

• Maintain SELL with a higher target price of RM4.60 (previous target price of RM4.48) following higher P/E applied. Our revised target price is now pegged at 34.7x FY20F P/E of (from 30.5x previously). Our valuation is in line with its 5-year mean P/E of 34.7x as we believe the Group is in midst of recovering mode and market has discounted the prevailing headwinds.

Source: JF Apex Securities Research - 7 Nov 2019