Period

1Q16

Actual vs. Expectations

1Q16 PATAMI of RM62.7m (+9.8% YoY) came in within expectations, at 22% and 23% of our and consensus’ full-year net profit forecasts, respectively.

Dividends

No dividend was declared in 1Q16. Note that a final single-tier DPS of 4.0 sen was proposed. This brings FY15 dividend to 13.0 sen which is within our expectation. Key Result

Highlights

QoQ, 1Q16 revenue came in 5% higher due to: (i) stronger sales volume in the nitrile glove segment (+9%), which accounted for 95% of sales, and (ii) 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 1Q16 rose by 2.8pts to 24.9% from 22.1% in 4Q15 due to contribution as well as economies of scale from new production lines from NGC plants. Consequently, 1Q16 core net profit rose 8.3% to RM62.7m (excluding write-off of RM3.1m from decommissioning Plant 1 in 4Q15 ).

YoY, 1Q16 revenue rose 14.8% due to higher sales volume (+15%) underpinned by new capacity from NGC. However, core net profit rose 8.3% due to lower effective tax rate of 21.4% compared to 24.3% in 1Q15. PBT margin was reduced from 27.1% to 24.9% due to operating expenses in relation to maintenance and natural gas cost.

Outlook

Looking ahead, we expect earnings to jump upon the gradual ramp up of the Next Generation Integrated Glove Manufacturing Complex (NGC) (known as Plant 7), deriving benefits from the economies of scale. Hartalega 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 commissioned 11 lines. Upon full commissioning, the first two plants will add c.8b pieces (+56%) new capacity by Oct-Dec 2015 and providing the much-needed earnings growth boost in 2HFY16 and FY17. Hartalega is relatively confident that capacity for the first plant will be absorbed upon full commissioning.

Change to Forecasts

No change to our earnings forecasts.

Rating

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). Share price is expected to be supported by a one-for-one bonus issue which was recently announced.

Risks to Our Call

Lower-than-expected ASPs.

Source: Kenanga Research - 5 Aug 2015