INVESTMENT HIGHLIGHTS

• 4QFY17 earnings within expectations

• Revenue boosted by increase in sales volume and high utilization rate

• Plant 3 commissioning on track

• Earnings forecasts maintained

• Maintain NEUTRAL with an unchanged TP of RM5.07

Within expectations. Hartalega’s 4QFY17 earnings came in at RM89.4m. This brings its FY17 earnings to RM283.0m which was within our and consensus expectations respectively. On a quarterly sequential basis, revenue saw an increase by +15.5%qoq whilst earnings surged by +35%qoq. As for yoy, revenue and earnings grew by +31.6% and +44.8% respectively. An interim dividend of 2.0sen was also declared during the quarter under review making the total dividend declared to date to 6.0sen.

Revenue boosted by increase in sales volume. In 4QFY17, sales volume for nitrile gloves increased by +22.8%yoy while on a sequential basis, volume increased by +14.2%qoq. As for natural rubber gloves, sales volume saw an increase of +42.3%yoy and +8.1%qoq respectively. The improved sales volume during the quarter was mainly attributable to: (i) better demand, (ii) high utilization rate of 89% and, (iii) a more competitive product pricing. Meanwhile, the average selling price (ASP) for Hartalega’s gloves increased by +4.7%qoq and +9.8%yoy due to higher raw materials price during the quarter which surged by about 8%qoq. It is also worth noting that the more stable condition of USD vs MYR which traded at a range of RM4.42-4.48 per USD during the quarter assisted in boosting the revenue.

Plant 3 commissioning on track. We understand from the management that Plant 3 of its NGC is well on-track to meet its full commissioning deadline. Plant 3 of the NGC is expected to be fully commissioned in November 2017. Out of the 12 lines planned for the plant, seven lines have been commissioned. In addition, we observed that net margin has also surged to 17% in 4Q17 vs 14.5% last quarter which is mainly due to: (i) better product pricing; (ii) increase in production capacity and; (iii) improvement in glove production processes. As a result, the cost of production per 1000 gloves has also reduced by -4.89%yoy due the abovementioned factors.

Earnings forecasts. We made no changes to our earnings forecasts as we believe Hartalega is on track to meet our earnings projections. In addition, we are introducing our FY19F numbers in this report. The key risks to our earnings are the: (i) unexpectedly high operating costs and; (ii) slower-than-expected recovery in ASP due to rise in costs and pricing competition.

Recommendation.

All in, we are reiterating our NEUTRAL recommendation on Hartalega with an unchanged TP of RM5.07 per share post results announcement. Our TP is derived via pegging our FY18F EPS of 21.2sen to PER18 of 24x, which is its five-year average PER. Despite the more positive outlook for Hartalega in FY18 we think the call is fair as we opine that all positives have been priced in at this juncture. In addition, Hartalega’s valuation which remains lofty at 34.1x FY17PER vs an average of 20x for its peers remains unattractive. Furthermore, its share price which has surpassed our TP earlier this week which further limits the share price appreciation in our opinion.

Source: MIDF Research - 11 May 2017