1HFY20 PATAMI of RM198m (-19% YoY) came in at 40%/41% of our/consensus full-year forecasts. We consider the results to be within our expectation as we expect the momentum from 2QFY20 sequential earnings improvement to spur subsequent quarters on uptick in demand. The stock has appreciated 15% since our upgrade in April 2019. We continue to remain bullish on sequential earnings growth in subsequent quarters. Hence, our TP is raised from RM5.85 to RM6.00 based on 36x FY21 EPS. Reiterate OP.

1HFY20 PATAMI of RM198m (-19% YoY) came in at 40%/41% of our/consensus full-year forecasts. We consider the results as within our expectation as we expect this second quarterly sequential earnings improvement to gather momentum in subsequent quarters on the back of uptick in demand to be driven by re-stocking activities. A 1st interim DPS of 1.8 sen was declared which is in line with our expectation.

Key results’ highlights. QoQ, 2QFY20 revenue rose 10% thanks to higher sales volume (+14%) but negated by a lower ASP (-3%). The higher volume sales are indicating signs of uptick in demand which is expected to drive earnings in subsequent quarters. This brings 2QFY20 PATAMI to RM104m (+11% QoQ).

YoY, 1HFY20 revenue fell by 5% largely due to lower ASPs (-5%). 1HFY20 PBT fell 10% as PBT margin fell 1.1ppt to 19.2% from 20.3% in 1Q19 which brings 1HFY20 PATAMI to RM198m (-19% YoY) dragged down by a higher effective tax rate of 23.4% compared to 14.8% in 1HFY19.

Stage is set for a recovery in demand for nitrile. The key highlight of 2QFY20 results is HARTA’s mid-teens sales volume growth indicating that demand and volume sale are on track to pick up in subsequent quarters. We continue to remain positive on sequential earnings recovery to gather momentum in subsequent quarters underpinned by uptick in nitrile demand, to be driven by re-stocking activities. Separately, due to the impact of trade war whereby effective Sept 1, a 15% tariff will be imposed on Chinese-made medical and vinyl gloves, local rubber glove players expect to see an uptick in demand for gloves of which the positive impact is expected to be felt from the Dec-ending quarter period. Theoretically, the tariff hike is expected to increase the price for Chinese-made gloves, which could compel a switch of US demand to Malaysian glove players including HARTA where US accounts for an estimated 53% of total volume sales.

Reiterate OUTPERFORM. 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 and cost reduction management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment. We keep our FY20E and FY21E earnings forecasts unchanged. The stock has appreciated 15% since our upgrade in April 2019. We continue to remain bullish on sequential earnings growth in subsequent quarters. Our TP is raised from RM5.85 to RM6.00 based on unchanged 36x FY21E EPS (rollover from CY20E). Reiterate OP.

Risks to our call. Lower-than-expected ASPs, volume sales and longer-than-expected approval for its anti-microbial gloves.

Source: Kenanga Research - 6 Nov 2019