Period     1Q14 

Actual vs. Expectations   The 1Q14 net profit of RM63m came in within expectations at 24-25% of our and the consensus full year forecasts.

Dividends    No dividend was declared for the current quarter. However, the company has earlier on July 9 declared a final single tier dividend of 4.0 sen per share which will go ex-div  on 4 Sept 2013. This brings its FY13 total dividend to 14.5 sen per share. 

Key Results Highlights   QoQ, the 1Q14 revenue rose 3% due to higher sales volume (+5%) in the nitrile glove segment, which accounted for 94% of sales which more than offset a 1.2% drop in ASPs. During the quarter, the utilisation rate trend was flat at 91% compared to 92% in 4Q13. The marginally lower utilisation rate was largely due to a slight reduction in sales volume from one of its clients. However, we understand that this is only a temporary setback as new buyers have been secured, which is expected  to be reflected in subsequent quarters. The EBITDA margin remains unchanged at 33%, similar to 4QFY13 level due to its “highly automated production processes” model, which leads  to solid improvement in its production capacity and a reduction in costs, allowing it to post better margins than its industry peers. 

YoY, revenue and net profit in 1Q14 jumped 12.2% and 17.9% respectively due to (i) a higher utilisation rate of 91% compared to 89% in 1QFY13, (ii) higher sales volume (+23%) due to the new capacity expansion from Plant 6; and (iii) easing raw material prices as well as economies of scale derived from new capacity and efficiency gains.

Outlook    Looking ahead, Hartalega is embarking on a massive capacity expansion consisting of 72 new production lines, which we believe will be mainly 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. 

On another note, we expect Hartalega to be further  re-rated once the acquisition of a piece of land near its current operation in Bestari Jaya is finalised by end 2013. The land is targeted for capacity expansion into specialty gloves, which command a margin of 30.0% compared to nitrile gloves’ 28.0%.

Change to Forecasts    We are upgrading both our FY14E and FY15E net profit by 3.0% to take in account slightly higher volume sales. 

Rating    Maintain OUTPERFORM.  Correspondingly, our TP is raised by 3% from RM7.10 to RM7.32 based on 18x CY14 EPS, at a 20% premium to the sector average 1-year forward PER target due to its superior margins and bigger market capitalisation.

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

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

Source: Kenanga