• 3QFY17 earnings within expectations

• Revenue boosted by increase in sales volume and high factory utilisation rate

• Earnings affected by forex loss

• Earnings forecasts maintained

• Maintain NEUTRAL with an unchanged TP of RM4.48

Within expectations. Hartalega’s 3QFY17 earnings came in at RM66.2m. This brings its 9MFY17 earnings to RM193.6m or 74% of our full year FY17 earnings forecasts, but lagged consensus expectations. On a quarterly sequential basis, revenue for the quarter saw an increase by +4.4%qoq whilst earnings declined by -7.0%qoq. On a year-over-year basis, revenue grew by +14.6% with earnings contracting by -9.1% respectively. A second interim dividend of 2.0sen was also declared during the quarter under review making the total dividend declared to date to 4.0sen.

Revenue boosted by increase in sales volume. In 3QFY17, sales volume for nitrile gloves increased by +18.7%yoy while on a quarterly sequential basis, volume increased marginally by +1.0%qoq. As for natural rubber gloves, although sales volume increased by +17.9%yoy, the sales volume dipped by -7%qoq. The improved sales volume during the quarter was mainly attributable to: (i) better demand, (ii) high factory utilisation rate of 86% and; (iii) a more competitive product pricing. Meanwhile, its average selling price (ASP) for nitrile gloves increased by +5.7%qoq due to higher raw materials prices.

Earnings affected by forex loss. Despite the strong revenue booked during the quarter, earnings dipped to RM66.2m (from RM71.2m in the previous quarter). This was mainly attributable to the: (i) recognition of unrealised foreign exchange loss incurred on the revaluation of its USD denominated loan and; (ii) fair value loss on foreign exchange forward contracts entered for the purpose of securing its USD denominated sales receipts. That said, we observed that its 9MFY17 net margin has managed to sustain at 15.0% largely due to improvements in glove production processes. Additionally, its balance sheet remains robust with gearing ratio recorded at 0.19x as of 31 December 2016.

Earnings forecasts. We are maintaining our earnings forecasts at this juncture. The key risks to our earnings are the: (i) unexpectedly high operating costs and; (ii) slower-than-expected recovery in average selling prices (ASP) due to rise in costs and pricing competition.

Recommendation. We are reiterating our NEUTRAL recommendation on Hartalega with an unchanged TP of RM4.48 per share post results announcement. Our TP is derived via pegging our FY18F EPS of 17.2sen to a PER18 of 26x, which is its 3-year average PER. We believe this is fair as we opine that all the positives have so far been priced in at this juncture. Additionally, despite recording improvements on its operational efficiencies and average selling prices, we think that the company lacks re-rating catalysts at the moment.

Source: MIDF Research - 15 Feb 2017