INVESTMENT HIGHLIGHTS

• 4QFY18 earnings within expectations

• Revenue boosted by increase in sales volume

• NGC capacity expansion well on track

• Potential inclusion into FBMKLCI Top 30

• FY19F earnings forecasts maintained

• Maintain NEUTRAL (negative bias) with revised TP of RM5.49

Within expectations. Hartalega’s 4QFY18 earnings came in at RM116.6m which is within our and consensus expectations, representing 101% and 102% of full-year earnings forecasts respectively. On a quarterly sequential basis, revenue and earnings grew marginally by +2.3%qoq and +3.3% whilst yoy, revenue and earnings increased by +17% and +30.7% respectively. A third interim dividend of 2.0sen was also declared for the quarter under review which brings the total dividend declared to date to 7.0sen or 1.2% yield to yesterday’s closing price.

Earnings boosted by increase in sales volume. In 4QFY18, sales volume for nitrile gloves increased by +27.9%yoy while on a quarterly sequential basis, nitrile gloves volume increased by +3.8%qoq. This helped in reducing the impact from the +23% increase in natural gas tariff earlier this year. The improved sales volume during the quarter was mainly attributable to: (i) better demand; (ii) increase in average selling prices (ASPs); (iii) higher utilisation rate of above 90% and; (iv) improvement in internal processes. It is also worth noting that the more stable condition of USD vs MYR which traded at an average of RM3.92 per USD during the quarter assisted in boosting both the revenue and earnings.

NGC capacity expansion well on track. Management disclosed that the commissioning of Plant 4 of NGC was completed in 1QCY18. We also understand that the capacity from Plant 4 is fully sold out as with the rest of the NGC plants. Meanwhile, the construction of its Plant 5 is completed, and it will start commissioning this coming July 2018. Additionally, Hartalega has also started constructing its Plant 6 and it is expecting Plant 6 to start commissioning in 1QCY19. Furthermore, we understand from the management that the company will also be constructing Plant 7 which will be focusing more on specialty gloves and small orders. Hartalega targets to commission the first line of Plant 7 by March CY19.

Potential inclusion into FBMKLCI Top 30. We opine that the recent share price increase for Hartalega is due to the potential inclusion into the FBMKLCI Top 30 index in the next review period. According to our analysis, Hartalega’s potential inclusion is based on the fact that it has met FTSE’s criteria for a non-constituent which has a turnover of at least 0.05% of shares in their issue (after the application of any investability weightings). This is based on their median daily trading volume per month for at least ten of the 12 months prior to the semi-annual review, making it eligible for inclusion into the FBMKLCI 30, in addition to already being included into the reserve list.

Earnings forecasts. We are maintaining our FY19F earnings estimates at this juncture as we opine that Hartalega is on track to meet our earnings projection. The key risks to our earnings are the: (i) fluctuation of USD vs MYR; (ii) lower than expected raw material prices; and (iii) lower demand from customers.

Recommendation. Post earnings announcement, we are maintaining our Neutral (negative bias) recommendation on Hartalega with a revised TP of RM5.49 (from RM4.83) per share as we roll forward our valuation parameters to FY20F. Our negative bias is premised on the fact that we believe Hartalega’s share price will retrace further in the coming three months to trade closer to its fundamentals once the inclusion of the new FBMKLCI component stocks has been announced. Additionally, we have also previously included the capacity expansion timeline into our financial estimates and we opine that all positives have been prices in at this juncture. Our TP is derived via pegging our FY20F EPS of 19.6sen pegged to an unchanged PER19 of 28x, which is its five-year average PER.

Source: MIDF Research - 16 May 2018