Hartalega  reported  FY14  results  that  were  below  our  and  consensus’expectations. This was mainly due to falling ASPs and  the  intensifying competitive  landscape.  While  we  are  positive  on  its  NGC,  we  believe that  timely  execution  is  key  in  bringing  back  production  growth. Maintain  NEUTRAL,  but  with  lower  FV  of  MYR6.61  (from  MYR7.40) following our earnings downgrade.

• FY14 weaker than expected.  Hartalega’s FY14 results came below our and consensus expectations, making up only  91% and 94% of the fullyear forecasts respectively.  Revenue  of MYR1,107.2m  increased 7.3% y-o-y  on the back of  increased production capacity.  Meanwhile,  its FY14 net profit  of MYR233.4m remained flat y-o-y  despite a  15%  increase  in sales volume, being offset by lower average selling prices (ASPs) due to increased  competition.  Sequentially,  4QFY14  revenue  remained  flat while its net profit of MYR49.1m  (-15.1% q-o-q;  -21.3% y-o-y)  declineddue  to an uptick in  operational expenses arising from  the recruitment of additional  staff  for  its  new  glove  complex.  For  FY14,  net  margin  shed 1.5ppts to 21.1%, due to increased operating and maintenance costs.
• Cutting  estimates.  Due  to  the  intensifying  competitive  landscape,  we remain cautious and  are cutting our FY15F estimates  by  11.9%  to take into account lower ASPs and we introduce our FY16F forecasts.
• 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.  Having  said  that,  we  believe  that  margins  will continue  to  come  under  pressure  in  the  next  few  quarters  due  to escalating  competition  in  the  nitrile  glove  segment,  which  will  exert downward pressure on ASPs. We also  believe that  the  timely execution of its next-generation integrated glove manufacturing complex (NGC) is crucial in bringing back production growth in the coming years. Following our  earnings  downgrade,  our  FV  is  lowered  to  MYR6.61  (from MYR7.40), pegged to an unchanged target P/E of 19x.  Our target P/E of 19x is +1.5  SD  of the stock’s historical 5-year average trading band,due to  the  company  having  a  lead  position  in  the  booming  nitrile  glove market,  and its high technological and automated production lines vs its peers.

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

Source: RHB