Period

4Q15/FY15

Actual vs. Expectations

FY15 core net profit (excluding write-off of RM3.1m from decommissioning Plant 1) of RM212.8m (-9% YoY) came in within expectations at 105% and 103% of our and consensus’ full-year net profit forecasts.

Dividends

A third interim single-tier DPS of 3.0 sen was declared. This brings FY15 dividend to 9.0 sen which is within our expectation as we expect a fourth interim dividend to be announced later. Key Result

Highlights

QoQ, the 4Q15 revenue came in 6.5% higher due to higher sales volume in the nitrile glove segment (+13%), which accounted for 90% of sales and the strengthening of the USD against the Ringgit which more than offset lower ASPs (-4%). Overall, higher volume sales (+9% QoQ) were underpinned by commercial operation of NGC in early Jan 2015. Pre-tax profit margin in 4Q15 fell by 2%pts to 22.1% from 24.1% in 3Q15 due to increase in maintenance and packaging material costs. Consequently, 4Q15 net profit rose 11% to RM54.9m thanks to a lower effective tax rate of 18% compared to 28% in 3Q15, due to recognition of tax losses in Hartalega NGC. Excluding write-off of RM3.1m from decommissioning Plant 1, 4Q15 core net profit would be RM58m (+17% QoQ).

YoY, FY15 revenue rose 3.5% due to higher sales volume (+9%). However, core net profit fell 9% due to lower profit margins. PBT margin was reduced from 27.9% to 24.2% due to operating expenses in relation to new recruitment for the NGC plant, increase in electricity tariff and natural gas tariff.

Outlook

Looking ahead, we expect earnings to kick-in upon gradual ramp up of 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. Currently, NGC has commenced 8 lines. 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 full commissioning.

Change to Forecasts

No changed to our earnings forecasts.

Rating

Ytd-2015, the share price has risen 17%. We continue to like the stock. 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 and TP of RM9.50 based on based on 24x FD CY16 EPS (at +2.0 SD above its historical forward average).

Risks to Our Call

Lower-than-expected ASPs.

Source: Kenanga Research - 6 May 2015