Period

3Q16 /9M16

9M16 PATAMI of RM195.9 (+27% YoY) came in at 68% and 70% of our and consensus’ full-year forecasts, respectively. We deemed the results as within expectation as we expect a stronger 4Q16 due to further ramp up in new capacity expansion.

Dividends

A second single tier interim DPS of 2.0 sen was declared, bringing 9M16 payout to 4.0 sen which is inline with our expectation.

QoQ, 3Q16 revenue came in 5% higher due to: (i) stronger sales volume in the nitrile glove segment (+7%) which accounted for 95% of sales, which more than offset lower ASPs (-3%) in RM terms. Overall, higher volume sales (+9%) were underpinned by commercial operations of NGC in early Jan 2015. Pre-tax profit increased by 22% due to higher sales volume, strengthening of US Dollar (USD) against Ringgit (RM) and the absence of a fair value loss on derivatives of RM20m in 2Q16. As such, pre-tax profit margin in 3Q16 rose 3 percentage points to 22.9%. Consequently, 3Q16 PATAMI rose 47% to RM73m.

YoY, 9M16 revenue rose 31% due to higher sales volume (+23%) and higher RM ASPs (+8%) underpinned by new capacity from NGC and weakening of the USD against RM. Correspondingly, core net profit rose 27% and boosted by a lower effective tax rate of 20% compared to 26% in 9M15. PBT margin was reduced from 24.9% to 22.4% due to forex losses.

Outlook

Looking ahead, we expect earnings to jump upon the gradual ramp up of the Next Generation Integrated Glove Manufacturing Complex (NGC). We expect the full commissioning of the first two plants by end 1QCY16. Presently, NGC has commissioned 19 lines. Upon full commissioning, the first two plants will add c.8b pieces (+56%) new capacity by and providing the much-needed earnings growth boost in 2H16 and FY17.

No change to our earnings forecasts.

Rating

We like Hartalega for its: (i) highly automated production processes model, (ii) solid improvement in 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 RM6.40 based on unchanged 28.5x CY17 EPS (at +2.0 SD above its historical forward average).

Risks to Our Call

Lower-than-expected ASPs.