Period  2Q15/1H15

Actual vs. Expectations 1H15 net profit of RM105.2m (-16.6% YoY) came in below expectations at 39-44% of our, and consensus, full-year forecasts. The negative variance from our forecast was due to higher-thanexpected operating expenses arising from new recruitment of labour for the incoming NGC project.

Dividends  A first interim single tier DPS of 3.0 sen was declared, which will go ex-div on 3 Dec 2014.

Key Result Highlights QoQ, the 2Q15 revenue came in marginally lower by 1.4% due to lower sales volume in the nitrile glove segment (-2%), which accounted for 92% of sales and lower average selling price (ASP) of nitrile gloves by 2%. Pre-tax profit margin in 2Q15 fell 3.5%-pts to 23.6% from 27.1% in 1Q15 due to front loading of expenses arising from new head count for the NGC project. Additionally, the head count reduction exercise through manpower rationalisation of the existing manufacturing operations also helped to mitigate the increase in staff cost arising from the recruitment for the NGC project in the previous quarter. Consequently, 2Q15 net profit fell 16% to RM48m exacerbated by a higher effective tax rate of 25.6% compared to 24.3% in 1Q15.

 YoY, 1H15 revenue fell 0.8% due to lower ASPs (-6%) attributed to lower raw material prices and competitive selling price but mitigated by higher sales volume (+7%). However, net profit fell 17% due to lower profit margin. EBIT margin was reduced by 4.1%-pts from 29.3% to 25.2% due to reduction in average selling price, increase in electricity tariff, natural gas tariff and operating expenses in relation to new recruitment for the NGC plant.

Outlook  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 We are downgrading our FY15E net profit by 8% to take into account the higher-than-expected start-up costs incurred in the NGC project. No change to our FY16 forecast.

Rating Correspondingly, our TP is reduced by 2% from RM7.48 to RM7.36 based on unchanged 20x CY15 revised 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. Maintain OUTPERFORM

Risks to Our Call  Lower-than-expected ASPs.

Source: Kenanga