INVESTMENT HIGHLIGHTS

• 2QFY18 earnings within expectations

• Revenue boosted by increase in sales volume

• Margin expansion from better cost management

• FY17-18F earnings forecasts lifted by +2.3% and +4.4%

• Maintain NEUTRAL with a revised TP of RM7.30

Within expectations. Hartalega’s 2QFY18 earnings came in at RM113.3m which is within our and consensus full-year earnings expectations at 54.0% and 53.5% respectively. On a quarterly sequential basis, revenue declined marginally by -2.7% however, earnings increased by +17.6%qoq respectively. As for yoy, revenue and earnings surged by +33.8% and +59.2% respectively. In addition, a first interim dividend of 3.5sen was also declared for the quarter under review.

Earnings boosted by increase in sales volume. In 2QFY18, sales volume for nitrile gloves increased by +34.6%yoy while on a sequential basis, volume increased by +4.2%qoq. As for natural rubber gloves, sales volume saw an increase by +1.6%yoy and +27.3%qoq respectively. The improved sales volume for nitrile gloves during the quarter was mainly attributable to: (i) switch in demand from vinyl gloves to rubber gloves; (ii) higher utilization rate of 92% and; (iii) improvement in internal processes. Meanwhile, Hartalega’s ASP for gloves declined by about -6.5%qoq due to lower raw materials price during the quarter which averaged at about RM5.38 vs RM6.15 per kg in 1QFY18 for natural rubber. However, the ASP was still higher by about +2.2%yoy.

Margin expansion from better cost management. During the quarter, we also observed that net margin has also increased from 16% in 1QFY18 to 19.4% in 2QFY18 and from 16.3% in 2QFY17 to 19.4% in 2QFY18 which was mainly due to: (i) better product pricing; (ii) high utilization rate; (iii) improvement in glove production processes and; (iv) better cost management.

Plant 4 commissioning on track. We understand from the management that Plant 4 commissioning is on track and will be completed by mid-CY18. It has also begun to contribute to the revenue of Hartalega, albeit marginally in 2Q18. In addition, Hartalega has also started working on its Plant 5 of NGC. We understand that Plant 5’s construction is now at piling stage and will be ready for commissioning in the second half of CY18.

Earnings forecasts. Post-earnings announcement, we revise our FY17-18 earnings by +2.3% and +4.4% as we increase our utilization rate assumption to 90% from 88% in view of more efficient utilization of capacity and growing demand going forward. 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 a revised TP of RM7.30 per share post results announcement. Our TP is derived via pegging our FY19F EPS of 28.1sen to PER19 of 26x, 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. Furthermore, its share price has rallied to a new 52-week high during past month which further limits the share price appreciation in our opinion.

Source: MIDF Research - 8 Nov 2017