Period  2Q14 /1H14

Actual vs. Expectations   The 1H14 net profit of RM126m (+13% yoy) came in within expectations at 48% of our and the consensus full year forecasts.

Dividends  A first interim single-tier dividend of 3.5 sen was declared which will go ex-div on 27 Nov 2013.  

Key Results Highlights  QoQ, the 2Q14 revenue rose only 1% due to lower sales volume in the nitrile glove segment (-1.8%), which accounted for 94% of sales and lower average selling price (ASPs) but this was mitigated by higher sales volume from latex gloves (+53%), albeit its small base. During the quarter, the utilisation rate was lower at 86% compared to 91% in 1Q14. 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. Despite unrealised foreign exchange loss of RM6.5m in 2Q14, EBITDA margin remains unchanged at 33%, similar to 1Q14 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 other industry peers. QoQ, 2Q14 net profit came in flat at RM63m due to the flattish sales as well as recognition of unrealised foreign exchange loss.

 YoY 1H14, revenue and net profit in 1Q14 jumped 11% and 13% respectively due to: (i) higher sales volume (+20%) underpin by the new capacity expansion from Plant 6 and (ii) 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 gradually start contributing in FY15. A total of eight lines or an estimated 10%-12% increase in 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 our TP of RM8.13 based on 20x CY14 EPS (at +2.0 SD of its historical average).

We like Hartalega for its: (i) 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) innovation in producing superior quality nitrile gloves; and (iv) positioning in a booming nitrile segment with a dominant market position.

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

Source: Kenanga