12M16 PATAMI of RM257.6m (+23% YoY) missed our and consensus’ full-year forecasts by 10% and 6%, respectively. The negative variance from our forecast was due to lowerthan- expected ASPs. We downgrade our FY17 and FY18 net profit by 10-12% to take into account the lower margins. Correspondingly, our target price is reduced from RM5.50 to RM4.83 based on 26x CY17 EPS (at +0.5 SD above its historical forward average).

Maintain Outperform. 12M16 PATAMI of RM257.6m (+23% YoY) missed our and consensus’ full-year forecasts by 10% and 6%, respectively. The negative variance from our forecast was due to lower-than-expected ASPs. A third single tier interim DPS of 2.0 sen was declared, bringing 12M16 payout to 6.0 sen which is inline with our expectation as we expect a final DPS to be declared somewhere in Aug 2016.

Result highlights. QoQ, 4Q16 revenue came in 0.6% higher due to: (i) stronger sales volume in the nitrile glove segment (+10%) which accounted for 95% of sales, which more than offset lower ASPs (-11%) in MYR terms. The higher volume sales were underpinned by commercial operations of NGC in early Jan 2015. However, due to some competitive pressure, operating margin fell from 22.9% in 3Q16 to 17.7% in 4Q16 due to lower ASPs and higher natural gas cost. This brings 4Q PATAMI to RM61.7m (-15% QoQ).

YoY, 12M16 revenue rose 31% due to higher sales volume (+30%) and higher MYR ASPs (+6%) underpinned by new capacity from NGC and weakening of the USD against MYR. Correspondingly, core net profit rose 23% boosted by a lower effective tax rate of 19% compared to 24% in 12M15. PBT margin was reduced from 24.2% to 21.2% due to lower margins in 4Q16 arising from competitive pressure leading to lower ASPs.

Outlook. We are not perturbed by the temporary lower margins of which are expected to be more than offset by new capacity expansion. Looking ahead, we expect earnings to jump upon the gradual ramp up of the Next Generation Integrated Glove Manufacturing Complex (NGC). Presently, NGC has commissioned all 24 lines of plant 1 and 2 combined. These two plants will add c.8b pieces (+56%) new capacity and providing the much-needed earnings growth boost in FY17.

Downgrade FY17 and FY18 net profit. We are lowering our FY17 and FY18 net profit forecast by 10-12%, taking into account the lower margins. We conservatively cut our target price PER from 27x to 26x to reflect the lower margins. Correspondingly our target price is reduced from RM5.50 to RM4.83 based on 26x revised CY17 EPS (at >0.5 SD above its historical forward average).

Maintain Outperform. We like Hartalega for its: (i) highly automated production processes model, (ii) new capacity expansion to boost earnings, (iii) innovation in producing superior quality nitrile gloves, and (iv) positioning in a booming nitrile segment with a dominant market position. 

Source: Kenanga Research - 4 May 2016