1Q17 PATAMI of RM56.2m (-10.4% YoY) came in marginally below expectations at 20% of our and consensus’ full-year net profit forecasts. The negative variance from our forecast was due to lower-than-expected ASPs. We trim both our FY17E and FY18E net profits by 2% to take into account lower-than-expected ASPs. Correspondingly, our Target Price is reduced from RM4.83 to RM4.72 based on unchanged 26x CY17 revised EPS. However, we maintain our OUTPERFORM call for its new capacity expansion, which will boost earnings.

1Q17 PATAMI of RM56.2m (-10.4% YoY) came in marginally below expectations at 20% of both our and consensus’ full-year net profit forecasts. The negative variance from our forecast was due to lowerthan- expected ASPs. No dividend was proposed or declared for the current quarter under review as expected.

Result highlights. QoQ, 1Q17 revenue came in 0.3% higher due to: (i) lower sales volume in the nitrile glove segment (-2%) which accounted for 95% of sales but was mitigated by marginally higher ASPs (+1%) in MYR terms. The lower utilisation rate at 81% compared to the average of 85% was probably due to the wait-and-see attitude of buyers on the back of higher supply and raw materials price volatility. However, we understand that volume has moved up to the low teens with utilisation hitting the 85% mark starting from July. Due to some competitive pressure, operating margin marginally decrease from 17.8% in 4Q16 to 17.0% in 1Q17 due to price competition, increase in raw material prices, natural gas, and mitigated by lower depreciation charges arising from changes in depreciation method from reducing balance method to straight line with effect from 1 April 2016. This brings 1Q17 PATAMI to RM56.2m (-9% QoQ).

YoY, 1Q17 revenue rose 25% due to higher sales volume (+26%) and flattish ASPs underpinned by new capacity from NGC and weakening of the USD against MYR. PBT margin was reduced from 24.9% to 17% to due to competitive pressure leading to lower ASPs.

Outlook. Looking ahead, we understand that volume in the month of June and July have moved up to low teens with utilisation hitting the 85% mark. We are not perturbed by the temporary lower margins 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 boost to FY17 earnings.

Trim FY17E and FY18E net profits. We trim our FY17E and FY18E net profits forecasts by 2% each, taking into account the lower-thanexpected ASPs. Correspondingly our target price is reduced from RM4.83 to RM4.72 based on unchanged 26x CY17 revised 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 - 3 Aug 2016