Hartalega (HART)’s 1HFY14 net profit was  broadly  within  forecasts, making up 46.7% and 47.2% of our and consensus’ full-year estimates. That  said,  its  2QFY14  net  profit  was  flat  q-o-q  owing  to  MYR6.4m  in realised forex losses. With forward earnings facing some downside risk from rising competition and potentially higher energy cost next year, we downgrade  the  stock  to  NEUTRAL  (from  Buy),  but  maintain  our MYR7.95 FV, pegged to the existing FY15F target P/E of 20x.

- Within expectations. HART’s 1HFY14 net profit came in broadly in line with  our  and  consensus  expectations,  comprising  46.7%  and  47.2%  of both  FY14  forecasts  respectively.  The company’s 2QFY14  revenue  of MYR281.0m  was  flat  q-o-q  as  the  higher  sales  volume  was  offset  by lower  average  selling  prices  (ASPs)  due  to  escalating  competition. Meanwhile,  its  2QFY14  net  profit  of  MYR63.3m  also  came  in  flat  q-o-q due  to  the  negative  impact  of  a  realised  forex  loss  of  MYR6.4m  during the  quarter.  YTD,  HART  posted  a  solid  1HFY13  net  profit  of MYR126.2m,  up  12.8%  y-o-y,  on  the  back  of  increased  production capacity and operating efficiency. As the company proposed a single-tier dividend  of  3.5  sen,  we  maintain  our  FY14  forecast  DPS  of  16.7  sen based on a 45% dividend payout ratio.

- NGC  on  track.  We understand that HART’s next-generation  integrated glove  manufacturing  complex  (NGC)  is  making  good  progress,  with construction on its first line to commence in Aug 2014. Upon completion of  its  new  facility  by  2020,  the  NGC  would  boost  HART’s  overall production  capacity  to  43bn  pieces  per  annum  compared  with  14bn pieces currently.

- Risks.  The  potential  risk  to  earnings  risks  are  a  gas  price  hike  and declining ASPs due to competitive pricing.

- Downgrade  to  NEUTRAL.  Overall,  we  believe  that  HART  is  close  to being  fully  valued  as  its  share  price  has  rallied  by  about  26.0%  since June  this  year.  With  much  of  the  good  news  already  priced  in,  we downgrade the stock to NEUTRAL on valuation grounds. No changes to our  MYR7.95  FV,  based  on  a  20.0x  FY15  P/E,  which  is  at  a  slight discount to its 3-year average P/E of 21x.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Hartalega Holdings Bhd manufactures a wide range of latex gloves and is the world’s largest nitrile glove producer. 

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Source: RHB