Hartalega’s  9MFY14  net  profit  of  MYR184.1m  was  below  our  and consensus estimates, comprising only 68.1% and 69.6% of the full-year forecasts  respectively.  We  attribute  the  subpar  results  to  falling  ASPs due  to  lower  material  costs  and  escalating  competition.  Maintain NEUTRAL, but with a lower MYR7.40 FV (from MYR7.95) as we trim our earnings estimate and cut our P/E to reflect sustained margin pressure.

Results  below  expectations.  Hartalega’s 3QFY14  results  were  below our and street estimates. Its 3QFY14 revenue of MYR267.8m was 4.7% lower  q-o-q  due  to  flat  sales  growth  as  average  selling  prices  (ASPs) dipped  about  5%  due  to  lower  material  costs.  Although  raw  material costs  spiked  up  some  50%  in  Oct  2013,  the  company  was  only  able  to adjust its ASP to pass on the higher costs in December. This clipped its 3QFY14  EBITDA  margin  by  1.4ppts  q-o-q  to  29.3%,  while  net  profit contracted 8.4% q-o-q to MYR57.9m. On a YTD comparison, Hartalega posted a 9MFY14 revenue of MYR826.8m and net profit of MYR184.1m, 8.5%  and  6.7%  higher  y-o-y  respectively,  due  to  improved  efficiency  at its  production  plants,  as  well  as  contributions  from  its  new  production lines. During 9MFY14, margins dipped 0.7ppt to 28.9%.

Trimming  estimates.  The  subpar  results  prompt  us  to  trim  our  FY14F and  FY15F  estimates  by  5.6%  and  2.1%  respectively  to  MYR255.8m and  MYR283.0m,  which  also  take  into  account  the  lower  ASPs  amid rising competition.

Risks.  The  key  risks  are:  i)  a  spike  in  raw  material  prices,  ii)  a depreciation of the USD, and iii) price competition within the industry.

Maintain  NEUTRAL.  Although  we  continue  to  like  Hartalega’s lead  in technological  and  automation  processes,  we  believe  that  margins  will continue  to  come  under  pressure  in  the  upcoming  quarters  due escalating  competition  in  nitrile  gloves,  which  will  exert  downward pressure  on  ASPs.  Pegging  our  revised  EPS  at  a  lower  target  P/E multiple  of  19x  (revised  from  20x  on  concerns  of  margin  pressure),  we revise  our  FV  to  MYR7.40  (from  MYR7.95).  Our  target  P/E  of  19x  is +1.5SD of the stock’s historical 5-year average trading band.

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