12M17 PATAMI of RM283m (+10% YoY) came in within expectations at 98%/99% of our/consensus full-year forecasts. 4Q17 marked the third consecutive quarterly hike in ASPs. We expect better performance in subsequent quarters on the back of higher demand underpin by new capacity expansion from plant 3 and margins expansion emanating from better operating efficiency and economies of scale due to increased capacity and higher volume sales. We upgrade our FY18 and FY19 net profit by 12%. Correspondingly our TP is raised from RM5.33 to RM6.00 based on an unchanged 26.5x CY18 revised EPS (+0.5 SD above 5-year historical forward average). Maintain OUTPERFORM.

Result highlights. QoQ, 4Q17 revenue rose 15% due to higher ASPs (+5%) and sales volume (+14%) as a result of full utilisation in plant 1 and 2 as well as gradual commercialisation of plant 3. 4Q17 EBITDA margin improved 5.2%pts to 26.2% from 21% in 3Q17 due to the reduction of operation overhead; improvement in operation efficiency and strengthening of USD. Similarly, PBT margin improved by 5.2%-pts to 22.5%. This brings PBT to RM118 (51%). However, 4Q17 PATAMI came in at RM89m (+35% QoQ) due to a higher effective tax rate of 24.5% compared to 15.2% in 3Q17. A third interim DPS of 2.0 sen was declared bringing 12M17 DPS to 6.0 sen which is within our expectation as we expect a final dividend somewhere in 3Q 2017.

YoY, 12M17 revenue rose to an impressive RM1,822m (+22% YoY) due to higher sales volume (+24%) which more than offset lower ASPs (-2%) underpinned by new capacity from NGC and strengthening of the USD against MYR. However, overall PBT margin was reduced marginally to 19.1% in 12M17 from 21.1% in 12M16 due to higher natural gas cost and competitive pressure, which led to lower ASPs. This brings PATAMI to RM283m (+10% YoY).

Outlook. Looking ahead, due to the pent-up demand for rubber gloves, NGCs plant 1 and 2 are presently fully utilised. Correspondingly, we expect new capacity from the gradual ramp up in plant 3 to boost earnings in subsequent quarters. We would not be overly surprised if plant 3 is fully commissioned faster than expected on the back of a strong demand. Due to the lag effect in passing cost through as a result of higher natural gas and raw material (latex) costs, we expect glove makers to raise ASPs, which should contain high operating costs. 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. Plant 3 will add c.4b pieces (+18%) new capacity and provide the much-needed boost to FY18 earnings.

FY8 and FY18 net profit raised by 12%. We raised our FY18 and FY19 by 12% to take into account of higher volume sales (+16% growth rate compared to 10% previously) underpin by plant 3.

Maintain OUTPERFORM. Correspondingly, we upgrade our target price from RM5.33 to RM6.00 based on unchanged 26.5x CY18 revised EPS. 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.

Risks to our call. Lower-than-expected ASPs and delay in commissioning of new production lines.

Source: Kenanga Research - 11 May 2017