• 1QFY18 earnings within expectations

• Revenue boosted by increase in sales volume and better ASP

• Plant 4 commissioning on track

• Earnings forecasts maintained

• Maintain NEUTRAL with an unchanged TP of RM6.99

Within expectations. Hartalega’s 1QFY18 earnings came in at RM96.4m which is within our and consensus full-year earnings expectations at 25.1% and 24% respectively. On a quarterly sequential basis, revenue and earnings increased by +14.1%qoq and +7.8%qoq respectively. On-year, revenue and earnings surged by +49.6%yoy and +71.6%yoy respectively. No dividend was declared for the quarter under review.

Earnings boosted by increase in sales volume and better ASP. In 1QFY18, sales volume for nitrile gloves increased by +40.6%yoy while on a quarterly sequential basis, volume increased by +12.3%qoq. As for natural rubber gloves, sales volume saw a contraction of - 27.3%yoy and -20.8%qoq respectively. The improved sales volume for nitrile gloves during the quarter was mainly attributable to: (i) better demand; (ii) increase in average selling prices (ASPs); (iii) higher utilisation rate of 91%; and (iv) improvement in internal processes. Meanwhile, Hartalega’s ASP for gloves increased by <1.0%qoq and +10.6%yoy due to higher raw materials price during the quarter which averaged at about RM6.15 per kg for natural rubber. It is also worth noting that the more stable condition of USD vs MYR which traded at an average of RM4.31 per USD during the quarter assisted in boosting both the revenue and earnings.

Plant 4 commissioning on track. Post completion of NGC’s Plant 3 back in June, we understand from the management that Plant 4 of its NGC is well on-track to start commissioning in early August. Management expects to complete the commissioning of Plant in the first quarter of calendar year FY18. In addition, we observed that net margin has also remained in mid-teens of 16% in 1QFY18 vs 14.0% in 1QFY17 which was mainly due to: (i) better product pricing; (ii) increase in production capacity; and (iii) improvement in glove production processes.

Earnings forecasts. We make no changes to our earnings forecasts as we believe Hartalega is on track to meet our earnings projections. The key risks to our earnings are the: (i) unexpectedly high operating costs and; (ii) delay in its capacity expansion plans.

Recommendation. All in, we are reiterating our NEUTRAL recommendation on Hartalega with an unchanged TP of RM6.99 per share post results announcement. Our TP is derived via pegging our FY19F EPS of 26.9sen to PER19 of 26x, which is its three-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 26.6x FY17PER vs an average of 19x for its peers remains unattractive. Furthermore, its share price has surpassed our TP last week which further limits the share price appreciation in our opinion.

Source: MIDF Research - 9 Aug 2017