Period  3Q14 /9M14

Actual vs. Expectations The 9M14 net profit of RM184m (+7% YoY) came in at 70% of our and the consensus full year forecasts. We consider the 9M14 results to be within our expectations as we anticipate a much stronger 4Q14 performance in the absence of plant maintenance.

Dividends  A second interim single tier DPS of 3.5 sen was declared, which will go ex-div on 4 Mar 2014. This brings its 9M13 total dividend to 7.0 sen.

Key Result Highlights QoQ, the 3Q14 revenue fell 5% due to: (i) lower sales volume in the nitrile glove segment (-1.6%), which accounted for 94% of sales and (ii) lower average selling price (ASPs) in the nitrile gloves segment (-3.1%). The lower utilisation rate was largely due to plant maintenance in 3Q14 causing production downtime. However, we understand that this is only a temporary setback as the utilisation rate going into 4Q14 has improved post plant maintenance. 3Q14 EBIT margin fell marginally to 27.9% from 29.2% in 2Q14 due to higher raw material prices of nitrile and lower average selling prices. We are not perturbed as 4Q14 earnings are expected to be better QoQ, underpinned by higher utilisation rate and better ASPs, which were affected end Dec 2013. Correspondingly, 3Q14 net profit fell 7% to RM58m, QoQ.

 YoY, 9M14 revenue and net profit jumped 9% and 7%, respectively due largely to higher sales volume (+16%) underpinned by the new capacity expansion from Plant 6.

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 RM2. 26b, including land cost and be carried out in two phases over eight years between 2014 and 2021. We understand that the construction of plant 1 and 2 and supporting facilities commence in 4Q CY2013 and we expect to commission some of the production lines in the 4th quarter of calendar year 2014 and other production lines will come on stream progressively. 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 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 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