FY19 PATAMI of RM456.2m (+4% YoY) came in within our, but below consensus, expectations at 95%/93% of respective full-year forecasts. We expect better performance in subsequent quarters on the back of recovery in demand, ASPs and weakness in MYR against USD. Our TP is RM5.85 based on 36x CY20 EPS. Reiterate OP. We like HARTA for it is well-managed and consistently head and shoulders above peers in terms of efficiency, profitability and technology.

FY19 PATAMI of RM456.2m (+4% YoY) came in within our, but below consensus, expectations at 95%/93% of respective fullyear forecasts. A 3rd interim dividend of 1.9 sen was declared in this quarter bringing 9M19 to 6.3 sen which is within expectation. Typically, the final dividend is declared somewhere in 3Q 2019.

Key results’ highlights. QoQ, 4Q19 revenue fell 5.5% due to lower sales volume (-1%) and ASP (-5%). The lower volume sales were due to competitive pressure. 4Q19 PBT margin decreased 4.1ppt to 16.6% from 20.7% in 3Q19 due to lower ASPs as strengthening of the ringgit within a short time frame caused the Group unable to pass on the corresponding cost increase to customers in a timely manner. This brings 4Q19 PATAMI to RM91.4m (-24% QoQ).

YoY, FY19 revenue rose by 18% due to higher sales volume (+10%) and ASP (+6%). Correspondingly, PBT rose 5% due to increase in sales volume despite PBT margin eroding by 2.4ppt to 19.5% from 21.9% in FY18. This brings FY19 PATAMI to RM456.2m (+4% YoY) due to a higher effective tax rate of 17.3% compared to 16.5% in FY18.

Oversupply concerns appear overplayed, ASPs pressure contained. In the last two years, the sector has become a victim of its own success. The frantic pace of capacity expansion has resulted in a mild excess supply situation for rubber gloves leading to ASPs compression and flattish or lower profits over the past two quarters. However, we take comfort that this is nothing more than just a temporary rough patch. However, with the rubber gloves players becoming aware of the intense competition since four months ago; over the last few months, they have implemented any of these measures; (i) slowed new capacity expansion, (ii) more measures to maintain margins, including automation and other cost reduction initiatives, and (iii) intensifying sales efforts to penetrate emerging economies. As such, theoretically, the ASPs pressure problem in the sector should fully sort itself out within another quarter. Hence, we expect HARTA’s margins to recover and hence earnings to improve in subsequent quarters. Interestingly, industry ASP pressure is well contained ranging between USD21-23/1,000 pieces as compared to the previous down-cycle in 2016 ranging between USD19- USD21/1,000 pieces.

Maintain OP. Our TP is RM5.85 based on 36x CY20 EPS (at +1.0SD above 5-year historical forward mean). We like HARTA for: (i) its “highly automated production processes” model, which is moving from ‘good’ to ‘great’ as they are head and shoulders above its peers in terms of better margins with solid improvement in production capacity and reduction in costs, (ii) its superior quality nitrile gloves through product innovation, and (iii) its nitrile gloves segment, which is booming.

Risks to our call: Lower-than-expected volume sales and slowerthan-expected commissioning of new production lines.

Source: Kenanga Research - 8 May 2019