Period  4Q14 /FY14

Actual vs. Expectations  FY14 net profit of RM233m (-0.1% YoY) came in within our expectation, at 98% of our full-year forecasts. However, the net profit missed consensus by 7%.

Dividends  A third interim single tier DPS of 3.5 sen was declared, which will go ex-div on 26 May 2014. This brings its FY14 total dividend to 10.5 sen.

Key Result Highlights QoQ, the 4Q14 revenue rose 4% due to: (i) higher sales volume in the nitrile glove segment (+5%),

which accounted for 91% of sales and (ii) flattish average selling price (ASPs) of nitrile gloves. However, pre-tax profit margin in 4Q14 fell to 25.1% from 27.9% in 3Q14 due to cost pressures emanating from higher plant maintenance (shorter replacement cycle for formers from every three years to yearly as per clients’ requirement to maintain quality), more expensive electricity, consumables and labour (hiring ahead of 4QCY14 commissioning of NGC). Higher sales of latex-based gloves which currently account for 10% (and going forward) compared to 5% previously, also contributed to the lower margins. Consequently, 4Q14 net profit fell 21% to RM49.2m, dragged down by a higher effective tax rate of 29% compared to 22% in 3Q14.

 YoY, FY14 revenue rose 7% due to higher sales volume (+15%) which more than offset lower ASPs. However, net profit came in flat at RM233m due to cost pressures emanating from higher plant maintenance (shorter replacement cycle for formers from every three years to yearly as per clients’ requirement to maintain quality), more expensive electricity, consumables and labour (hiring ahead of 4QCY14 commissioning of NGC).

Outlook  Looking ahead, with its existing plants already running at optimum capacity, sales volume will remain relatively flattish at least until 3Q15. However, management reiterated that 4Q14 margins are expected to be sustained in subsequent quarters and start improving once the NGC plant 7 begins commercial production due to economies of scale.

Change to Forecasts No changes to our forecasts.

Rating Maintain OUTPERFORM and our TP of RM7.48 based on 20x CY15 FD EPS (at +2.0 SD of its historical average). The stock is currently trading at undemanding valuations of 16x and 15x on FD CY15 and CY16 EPS compared to average net profit growth of 12% per annum over the next two years.

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