INVESTMENT HIGHLIGHTS

• 9MFY19 earnings of RM364.8m came in below expectation due to slower than expected 3QFY19 earnings growth

• Increase in operating expenses and tax expenses dragged 3QFY19 earnings

• Plant capacity expansion plans on track to meet surging future demand

• Declared second interim dividend of 2.2sen per share declared for FY19

• Maintain NEUTRAL with a revised TP of RM5.34 per share

Cumulative 9MFY19 earnings below our expectation. Hartalega Holdings Berhad (Hartalega)’s 3QFY19 came in at RM119.8m. This bring its cumulative 9MFY19 earnings to RM364.8m, which is below our but met consensus expectations, accounting for 68.5% and 71.7% of full year FY19 earnings forecasts respectively. Comparing quarter to quarter, 3QFY19 revenue grew modesty at +1.3%qoq whilst earnings eased by -0.4%qoq.

3QFY19 revenue grew marginally at +1.3%qoq. 3QFY19 revenue rose by +1.3%qoq to RM723.4m, driven by a +3.0%qoq improvement in sales volume. Nonetheless, the competitive landscape led to a decline in average selling price (ASP) to RM100 per thousand pieces from RM102 per thousand pieces in the previous quarter. The decline is also despite a favourable MYR/USD average foreign exchange rate of RM4.18 during the quarter (vs Q2FY19: RM4.09).

However, 3QFY19 earnings eased by -0.4%qoq. 3QFY19 earnings eased by -0.4%qoq to RM119.8m. This was attributable to: (i) elevating operating expenses (+2.5%qoq) in view of higher energy and maintenance costs and; (ii) increase in provision of tax and deferred tax expense which result in a higher effective tax rate of 20.4% (vs Q2FY19: 15.4%)

Second interim dividend declared for FY19. The group has declared its second interim dividend of 2.2sen per ordinary share for FY19 (vs 2.0sen per ordinary share for FY18). This brings its cumulative dividend to 4.4sen per ordinary share.

Earnings forecasts. We are revising downwards our FY19F and FY20F earnings estimates by -4.7% and -5.1% respectively as we impute a: (i) lower ASP assumption due to the downward pressure on ASP as a result of heightening competition and: (ii) higher effective tax rate.

Source: MIDF Research - 13 Feb 2019