9M18 PATAMI of RM322.7m (+66.7% YoY) came in within expectations at 74%/76% of our/consensus full-year forecasts. Share price has run up by >100% over the last 10 months. We believe all the positives have been priced in. Downgrade from MARKET PERFORM to UNDERPERFORM. Reiterate TP at RM10.00 based on an unchanged 32.5x CY19 EPS (at +1.5 SD above 5-year historical forward mean).

9M18 PATAMI of RM322.7m (+66.7% YoY) came in within expectations at 74%/76% of our/consensus full-year forecasts. A second interim dividend of 4.0 sen was declared bringing 9M18 DPS to 7.5 sen, which is within our expectation.

Key Result highlights. QoQ, 3Q18 revenue rose 3% due to higher sales volume (+4%) which was offset by lower ASP. The higher volume sales were the result of full quarter contribution from Plant 3 as well as contribution from Plant 4. In contrast, the lower ASP was due to lower input raw material price. 3Q18 PBT margin decreased marginally by 0.5pp to 23% from 23.5% in 2Q18. This brings 3Q18 PBT to RM138.9m (+1.2%). Similarly, 3Q18 PATAMI came in at RM113.3m (-0.3% QoQ) due to a higher effective tax rate of 18.5% compared to 17.1% in 2Q18.

YoY, 9M18 revenue rose by an impressive 38% due to higher sales volume (+34%) and ASPs underpinned by new capacity from NGC Plant 3 as well as contribution from Plant 4. Correspondingly, PBT rose 70% as margin expanded by 4.0pp to 25.7% in 9M18 from 21.7% in 9M17 due to increase in sales volume and ASPs and improvement in operation efficiency on economies of scale from higher capacity. This brings PATAMI to RM322.7m (+66.7% YoY).

Outlook. Looking ahead, due to the pent-up demand for rubber gloves, Plant 1, 2 and 3 are presently fully utilised. In anticipation of higher demand, Hartalega (HARTA) has begun gradual commissioning of Plant 4 (ten lines) and the remaining two production lines will be commissioned progressively. We expect contribution from Plant 4 to drive 4Q18 and FY19 earnings growth. Due to the robust demand, construction of Plant 5 has commenced and is expected to boost additional capacity by 18% to 33.6b pieces per annum. The group is targeting to launch its anti-microbial gloves in Europe by CY2Q18 and is working on securing Federal Drug Administration (FDA) approval to enter the US market.

1-for-1 Bonus issue proposed. Separately, in an announcement to Bursa Malaysia, HARTA announced a 1-for-1 bonus issue.

Downgrade from MARKET PEROFRM to UNDERPERFORM. We maintain our FY18E and FY19E earnings forecasts. As its share price has run up by 100% over the last 10 months, we believed all the positives have been priced in. Hence, we downgrade our call from MARKET PERFORM to UNDERPERFORM. TP is RM10.00 based on 32.5x CY19 EPS (at +1.5 SD above 5-year historical forward mean). Near-term headwinds including appreciation of MYR against the USD, gas tariff hikes, and potential higher minimum wage could derail earnings.

Risks to our call. Higher-than-expected volume sales and faster- than-expected commissioning of new production lines.

Source: Kenanga Research - 07 Feb 2018