Period     12MFY13

Actual vs. Expectations     The 12MFY13 net profit of RM235m came in within expectations at 98% of ours and the consensus full year net profit forecasts.

Dividends     The company has declared a third single tier interim dividend of 3.5 sen per share. This brings its 12MFY13 total dividend to 10.5 sen per share. However, we believe a fourth or final dividend is expected to be declared in 3QCY13.

Key Results Highlights      QoQ, the 4QFY13 revenue rose 1.8% Q-o-Q due to a higher sales volume (+3%) in the nitrile glove segment, which accounted for 94% of the sales. Nitrile glove ASPs in 4QFY13 were flat at an average of RM98 per 1,000 pieces (3QFY12 RM98.50 per 1,000 pieces). During the quarter, the utilisation rate rose to 92% compared to 90.6% in 3QFY13 due to the commercial production of two lines from Plant 6. The EBITDA margin remained stable at 33.7% compared to 33.3% in 3QFY13 due to its “highly automated production processes” model, hence leading to a solid improvement in its production capacity and a reduction in costs and allowing it to post better margins when compared to its peers.

For the YTD FY13, the revenue and net profit jumped 11% and 16% respectively due to: 1) a higher utilisation rate of 90% compared to 83% in FY12; 2) higher sales volume (+21%) due to the new capacity expansion from Plant 6 and 3) an easing in the raw material prices.

Outlook      Plant 6 will have 10 production lines for nitrile gloves at 45,000 pieces/hour/line, 25% more than the current ones. This will bring its production capacity in Plant 6 to 3.9b pieces p.a., which will increase its total end-FY14 production capacity by 27% to 14b pieces. The plant is expected to be fully completed in mid-2013. To date, we understand that seven production lines have already been commissioned. The remaining three lines are expected to contribute progressively starting from 4QFY13. The construction of the remaining three will give a total of 10 lines in Plant 6.

Looking ahead, Hartalega is embarking on a massive capacity expansion consisting of 72 new production lines, which we believe will be largely for nitrile gloves. The expansion will cost RM1.9b and will be carried out in two phases over eight years between 2013 and 2021. We understand that the project is expected to commence in 2013 and to gradually start contributing in FY15. A total of eight lines or an estimated 10%-12% increase in the capacity to 15.4b pieces of gloves are expected to contribute to FY15 earnings with the first line expected to come on-stream in Aug 2014.

Change to Forecasts       No changes to our forecasts.

Rating     Maintain OUTPERFORM and TP of RM5.93 based on 15x CY14 EPS, 25% premium to our sector average 1-year forward PER target due to its superior margins and bigger market capitalisation compared to its peers.

We like Hartalega for (i) its “highly automated production processes” model, (ii) the solid improvement in its production capacity and a reduction in costs, leading it to achieve better margins compared to its peers, (iii) its superior quality nitrile gloves through product innovation and (iv) its positioning in a booming nitrile segment with a dominant market position.

Valuation      Hartalega is trading at 15.9x CY13 and 13.7x CY14 EPS, 23% above its peers’ average. We believe this is justifiable considering that Hartalega is an industry leader in terms of terms of margins, efficiency and technology.

Risks     Lower-than-expected sales volume due to a delay in the commercial production of its future plant expansion.

Source: Kenanga