Result

• Hartalega reported a net profit of RM121.2mil for its 3QFY20 results. The quarterly net profit increased 16.8% QoQ and 1.6% YoY. Meanwhile, the quarterly revenue stood at RM796.5m, rising 12.3%/2.1% QoQ and YoY.

• Matching consensus and in-house projection. Overall, 9MFY20 net profit of RM319.2m accounts for 72.0%/71.0% of ours/market full-year estimates.

• Second interim dividend declared. The group has declared a second single-tier dividend of 1.8 sen per share for FY20, adding total dividend declared for the financial year to 3.6 sen per share.

Comments

• Better QoQ performance. The Group’s revenue increased by 12.3% QoQ due to higher sales volume for the quarter. The higher QoQ sales volume resulted in increase of PBT by 16.3%. Furthermore, the Group was able to maintain stable PBT margin of 20.1% during this quarter against 19.4% in the preceding quarter.

• Moderate YoY performance. The Group’s revenue elevated by 10.1% whilst PBT increased by 6.5% in tandem with boosted sales for the quarter. We opine that the rise in PBT was mainly contributed by RM 7.8m (+375% YoY) from Other Income. Meanwhile, the operating profit increased marginally by RM3.2m (+2.1% YoY) no thanks to higher operating costs and low ASP.

• 9MFY2020 v 9MFY2019. Growth in revenue for 9MFY2020 was flat, +0.1% from the strong base. The plunge of operating profit -RM40m (-8.8%) indicated that the competition in the market still brutal, as we believe the demand is well behind the capacity expansion of glove manufactures.

• Expansion plan still in place. The plant 6 equips with 4.7 billion pieces capacity has started its 1st production line in January 2020 which comes on a good timing as novel coronavirus started to spread out during the period. The commencement of plant 6 has added the group total capacity to 36.6 billion per annum. The outsized capacity is able to cater the strong demand for the virus incident.

• Cautious 1QFY2021F but impact is short-lived. We are worrying about the inclusion of nitrile gloves in “Additional Section 301 Tariff Exclusions for Certain Imported Chinese Products on List 3” which was announced on 31 Jan, 2020 with effect till August 7, 2020. The exclusions tariff of nitrile gloves will definitely increase the Chinese supply to the US market in 2QCY2020 and negatively impact Hartalega, which has been benefiting from the trade war. Worse still, the excessive supply issue will exacerbate in conjunction with anticipated stabilizing of novel coronavirus in 2QCY2020 as glove manufacturers have been ramping up production to meet the extraordinary incident. The tariff exclusion could see estimated 800 million gloves being exported to the US market from China. Moving forward, more exclusion tariff of nitrile gloves applications is pending and could be granted in the coming months on the back of trade war optimism.

Earnings Outlook/Revision

• We increase our FY20F net earnings forecast by 12.5% to RM500.1m for FY20F by increasing the utilization rate. In addition, we uplift our FY21F net profit forecast by 7.4% to RM484.0m from RM450.5m.

Valuation & Recommendation

• Maintain HOLD with a higher target price of RM6.20 (previous target price of RM4.60) following higher P/E applied. Our revised target price is now pegged at 42x FY20F P/E of (from 34.7x previously). Our valuation is in line with its +1SD of 5-year mean P/E of 35x as we believe the Group is greatly benefited from the strong demand pursuant to recent Wuhan virus outbreak.

Source: JF Apex Securities Research - 12 Feb 2020