What’s New

• 3QFY17 core net profit declined 0.5% y-o-y, above expectations
• 3QFY17 revenue rose by 14.6% y-o-y on higher sales volume; EBIT/k gloves declined 21.6% y-o-y to RM18.42 but 5.9% higher q-o-q
• Maintain HOLD with TP of RM5.05

Steady glove player

Maintain HOLD, RM5.05 TP. We maintain HOLD on Hartalega with a revised TP of RM5.05, based on 27x CY17F EPS. We expect Hartalega to grow its sales volume at 17% CAGR over FY16-19F, in line with its capacity growth. However, its earnings CAGR will be more muted at 12% as we expect unit profitability to drop by 10%/2%/1% in FY17/18/19F on the back of margin compression arising from higher operating costs and increasing supply.

Premier nitrile glove maker. Hartalega’s Next Generation Complex (NGC) is expected to cement the group’s position as the premier nitrile glove maker in the world, reinforcing its competitive advantages with better efficiency and sufficient capacity growth. Set on a 112-acre site in Sepang, Hartalega’s NGC comprises six nitrile glove plants with a total of 72 production lines capable of producing 28.2bn gloves p.a. Each production line is able to churn out 45k gloves/hour, translating into a record high productivity of 2.6 employees/m gloves/month (vs 3.9 currently, and industry average of 4.7).

Hartalega’s NGC to drive growth ahead. The NGC Plants #1 and #2 were fully commissioned in March 2016 with 24 production lines. The average output per line is 45,000 pcs/hr. This pumps up its total capacity to 20bn pieces p.a. Meanwhile, the group has started construction of NGC Plant #3 which is targeted for completion in Oct 2017. The construction of NGC Plant #4 has been extended and is expected to complete by end-2018.

Valuation

Expect share price to consolidate at current level. The earnings growth prospect from NGC has largely been priced in. Our TP is based on 27x CY17 EPS.

Key Risks to Our View

Increased competition could erode margins. Hartalega could face increased competition as other glove makers crowd into the nitrile glove segment. This could reduce Hartalega’s lucrative margins.

Source: Alliance Research - 15 Feb 2017