Period  3Q15/9M15

Actual vs. Expectations  9M15 net profit of RM154.8m (-16% YoY) came in below expectations at 63% and 68% of our, and consensus, full-year forecasts, respectively. The negative variance from our forecast was due to higherthan- expected operating expenses arising from new labour recruitment for the incoming NGC project.

Dividends  A second interim single tier DPS of 3.0 sen was declared. This brings 9MFY15 dividend to 6.0 sen.

Key Result Highlights  QoQ, the 3Q15 revenue came in 4.1% higher due to slightly higher sales volume in the nitrile glove segment (+1%), which accounted for 90% of sales and higher average selling price (ASP) of nitrile gloves by 3%, which is a pleasant surprise. Pre-tax profit margin in 3Q15 rose marginally by 0.5%pts to 24.1% from 23.6% in 2Q15 due to increase in production output and better operation efficiency. Additionally, the headcount reduction exercise through manpower rationalisation of 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, 3Q15 net profit rose 3% to RM49.5m despite a higher effective tax rate of 28% compared to 25.6% in 2Q15.

 YoY, 9M15 revenue rose marginally by 1.7% due to lower ASPs (-4%) attributed to lower raw material prices and competitive selling price but more than offset by higher sales volume (+8%). However, net profit fell 16% due to lower profit margin. EBIT margin was reduced by 4%pts from 28.8% to 24.8% due to operating expenses in relation to new recruitment for the NGC plant, increase in electricity tariff and natural gas tariff.

Outlook  Looking ahead, with its existing plants already running at optimum capacity, sales volume will remain relatively flattish at least until 4QFY15. However, we expect earnings to kick-in once the Next Generation Integrated Glove Manufacturing Complex (NGC) (known as plant 7) begins commercial production, deriving benefits from economies of scale. HART highlighted that its NGC plant has started commercial operations, gradually from Jan-15 onwards with a planned commissioning of 2 lines per month. Upon full commissioning, the first two plants will add c.8b pieces (+56%) new capacity by Oct- 2015 and providing the much-needed earnings growth boost for FY16. Hartalega is relatively confident that capacity for the first plant will be absorbed upon commissioning.

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 FY16E earnings.

Rating  Ytd-2015, the share price has risen 8%. We continue to like the stock. We roll forward our valuation from CY15 to FY16 with an unchanged 21x PER. Correspondingly, our TP is raised from RM7.73 to RM8.20 based on unchanged 21x FY16 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