1Q19 PATAMI of RM124.9m (+30% YoY; +7% QoQ) came in at 27%/25% of our/consensus full-year forecasts. We consider the results as above our, but in line with market, expectations. Upgrade our FY19E/FY20E net profit by 4%/3% taking into account of the higher-than-expected volume sales. Correspondingly, TP raised from RM5.00 to RM5.15 based on 32.5x CY19 EPS. Reiterate UNDERPERFORM.

1Q19 PATAMI of RM124.9m (+30% YoY; +7% QoQ) came in above expectations at 27%/25% of our/consensus full-year forecasts. The variance from our results was due to higher-thanexpected volume sales. No dividend was proposed or declared in this quarter.

Key result highlights. QoQ, 1Q19 revenue rose 14.5% due to higher sales volume (+6%) and higher ASP (+8%). The higher volume sales were due to a higher utilisation rate of 92% in 1Q19 compared to 91% despite the absence of new capacity. 1Q19 PBT margin decreased 1.3ppt to 20.6% from 21.9% in 4Q18 despite lower heating cost, chemical cost, upkeep of plant & machinery and improved operational efficiency of which we believe ASP might not have sufficiently covered costs. This brings 1Q19 PBT to RM145.8m (+8%). 1Q19 PATAMI came in at RM124.9m (+7% QoQ) due to a higher effective tax rate of 14.2% compared to 13.4% in 4Q18.

YoY, 1Q19 revenue rose by an impressive 17.5% due to higher sales volume (+20%) which more than offset lower ASP (-2%) underpinned by new capacity from NGC Plant 4. Correspondingly, PBT rose 26% as margin expanded by 1.3ppt to 20.6% in 1Q19 from 19.3% in 1Q18 due to increase in sales volume and improvement in operation efficiency on economies of scale from higher capacity. This brings PATAMI to RM124.9m (+30% YoY).

Outlook. Looking ahead, the commissioning of Plant 5 will gradually commence, starting from Aug 2018 instead of July 2018 with construction of Plant 6 in 1Q 2019. Plant 5 and Plant 6 will each have annual installed capacity of 4.7b pieces. Additionally, Hartalega plans to set up Plant 7, expected in March 2019, which will focus on small orders as well as specialty products. Plant 7 will have an annual installed capacity of 2.6b pieces. We expect contributions from Plant 5 to drive FY19 earnings growth. Once completed, Plant 5 is expected to boost additional capacity by 16% to 33.1b pieces per annum. All in, Plant 5, 6 and 7 will add a total capacity of 12.1b pieces, raising installed capacity by 43% to 40.6b pieces per annum.

Upgrade FY19E/FY20E net profit by 4%/3%. Upgrade our FY19E/FY20E net profit by 4%/3% after taking into account the higher-than-expected volume sales from fresh capacity coming onstream staring from Aug 2018.

Reiterate UNDERPERFORM. Correspondingly, TP is raised from RM5.00 to RM5.15 based on an unchanged 32.5x PER (at +1.5 SD above 5-year historical forward mean) over CY19 EPS. The upgrade in TP is not sufficient to revise up our stock call. We believe all the positives have been priced in. Reiterate UNDERPERFORM.

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

Source: Kenanga Research - 8 Aug 2018