Period  1Q15

Actual vs. Expectations 1Q15 net profit of RM57.1m (-9.3% YoY; +16.1% QoQ) came in within our expectationKes and consensus, at 22% of both full-year forecasts.

Dividends  A final single tier DPS of 4.0 sen was declared on 1 Aug 2014, which will go ex-div on 8 Sept 2014. This brings its FY14 total dividend to 14.5 sen.

Key Result Highlights QoQ, the 1Q15 revenue came in marginally lower by 0.4% due to: (i) higher sales volume in the nitrile glove segment (+2.6%), which accounted for 92% of sales and (ii) lower average selling price (ASP) of nitrile gloves by 1.1%. However, pre-tax profit margin in 1Q15 rose to 27.1% from 25.1% in 4Q14 due to reduction in maintenance cost and production consumables arising from better operation efficiency. Additionally, the head count reduction exercise through manpower rationalisation of the existing manufacturing operations also help to mitigate the increase in staff cost arising from the recruitment for the NGC project in previous quarter. Consequently, 1Q15 net profit rose 16.1% to RM57.1m boosted by a lower effective tax rate of 24% compared to 29% in 4Q14.

 YoY, 1Q15 revenue rose 0.4% due to higher sales volume (+9.6%) which more than offset lower ASP (-6.2%). However, net profit fell 9.3% due to lower profit margin. EBIT margin was reduced from 29.4% to 27.0% due to reduction in average selling price, increase in electricity tariff, natural gas tariff and maintenance cost.

Outlook  We expect margins to sustain in subsequent quarters due to: (i) sustained high demand for nitrile gloves, (ii) slight ASP increase to mitigate the energy tariff hikes, and (iii) capacity constraint for nitrile gloves could put upwards pressure on prices. From our channel checks, demand for nitrile gloves is strong.

 Looking ahead, with its existing plants already running at optimum capacity, sales volume will remain relatively flattish at least until 3Q15. However, we expect margins to start improving or remain solid once the NGC plant 7 begins commercial production due to economies of scale. Construction of the first two plants of the NGC is proceeding smoothly, and is expected to be on track to commission the first batch of production lines in 4QCY14.

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 above 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 NGC plant expansion.

Source: Kenanga