From  management  we  understand  that  Hartalega’s  NGC  expansion  is on track  with  the first two lines expected to commence operations by end-2014. The recent  Ebola virus disease outbreak  in  west Africa  may drive  demand  for gloves.  Nonetheless,  we  see flat earnings  for  FY15F but  a  stronger  growth  for  FY16F.  We  adjust  our  earnings  forecastsslightly  and tweak our  FV  higher to  MYR6.95  (from MYR6.61). Maintain NEUTRAL.

Company  expansion  on  track.  Our  last  meeting  with  management indicates that the expansion of  its  next generation complex  (NGC)  is  on track. The first two lines are expected to commence operations by  end-2014, potentially boosting Hartalega’s installed capacity to about 14.7bn pieces per annum by end-2014 and the targeted 15bn pieces by FY15F. Hartalega aims  to achieve installed capacity of 22bn pieces per annum by FY16F and 42bn pieces per annum by 2020.

Ebola  outbreak could be a catalyst.  Based on the news flows in the past  few  weeks,  the  Ebola  virus  breakout  in  west  Africa  has  been aggravating  and should  this  turn  into  a  pandemic,  we foresee demand for  gloves  to  climb.  Earnings  for  gloves  manufacturers  including Hartalega could possibly surge.

Full-year  expectations  and  1QFY15  results  preview.  As  its  new capacity is scheduled to come onstream  only  by year-end,  we  believe that FY15 could be a flat  year on  a  y-o-y  basis.  In view of  intensifyingcompetition  and  escalating operating expenses,  Hartalega is rolling out cost-saving  initiatives  and  constantly  improving  its  technology  to maintain  its  superior  net  margin.  In  its  1QFY15  results  set  to  be released  on  5  Aug,  we  expect  its  topline  to  be  flattish  q-o-q  while  its bottomline should improve slightly q-o-q.

Maintain  NEUTRAL.  We  review  our  earnings  model  and  reduce  ourFY15F  earnings forecast by  6% as we  project flat earnings for  FY15F and  a  stronger  growth  for  FY16F.  Our  new  MYR6.95  FV  (from MYR6.61) is  pegged to  a  19x CY15  P/E  (from 19x FY15 P/E),  which is +1.5SD  of  its  historical  trading  band,  given  its  lead  position  in  the booming nitrile glove market as well as its technologically-advanced and automated production lines. Maintain NEUTRAL.

Company Update/Results Preview
NGC plant progress  on track.  The first two lines of its NGC are expected to come onstream by end-2014,  potentially increasing  its  total production capacity  to  around 14.7bn  pieces per annum  by end-2014  (from 14.0bn in FY14).  The total capacity is
projected  to  reach  around  15bn  pieces  per  annum  by  FY15.  The  NGC  project  is expected to be completed by 2020 and Hartalega’s total  installed  capacity will  thenpotentially  reach  42bn  pieces  per  annum  (from  14bn  pieces  per  annum  in  FY14). With the production lines of its NGC plant  equipped with  advanced  technology,  we expect the company’s overall production efficiency to improve going forward.

Ebola  outbreak  could  be  a  catalyst.  Based  on  the  World  Health  Organization(WHO)’s  latest update,  a total of  1,323  Ebola cases and 729 deaths  in west Africa were reported as at 27 July 2014. The Ebola outbreak is spreading faster than efforts to control it, according to the WHO.  Should  the outbreak  become more severe and turn  into  a  pandemic,  we see the  rubber gloves sector  may  gain traction again and gloves manufacturers including  Hartalega may  benefit from rising  demand for rubber gloves.

Managing  expectations.  We  estimate  that  Hartalega’s  FY15F  bottomline  may  be flattish  y-o-y,  in  view  of  intensifying  competition  and  higher  costs  arising  from:  i) higher electricity tariff, ii) higher natural gas prices,  and iii) higher staff costs  due to new  hiring  in  preparation  for  its  NGC  plant.  Hartalega  is  rolling  out  cost-savinginitiatives  and  constantly  improving  its  technology  to  maintain  its  superior  margin. Given  its  aggressive  expansion  in  FY15F,  we  expect  stronger  earnings  growth  in FY16F. We conservatively forecast for  a slight 1.3ppts y-o-y  decrease  in Hartalega’s net margin for FY15F and expect FY16F net margin to remain the same. If Hartalega is able to improve efficiency and keep its net margin at 20%, this should translate into a surprise earnings upside against our forecast.

Earnings  preview.  Hartalega  is  scheduled  to  release  its  1QFY15  earnings  on  5 August  after  trading  hours.  On  a  q-o-q  basis,  we  estimate  that  its  topline  should remain flattish  mainly because Hartalega did not install any new capacity in the past few  months.  However,  we  believe  its  bottomline  should  improve  q-o-q  on  higher efficiency driven by its effective cost control and cost-saving initiatives.

Maintain NEUTRAL.  Due to relocation of resources, we have reviewed and updated Hartalega’s  earnings  model.  We  adjust  our  FY15F  earnings  forecast  by  -6%  and FY16F forecast by a minimal  <1%. We  see flat earnings for  FY15F  but  a  stronger
growth  for FY16F.  Our new  MYR6.95  FV (from MYR6.61) is pegged to a  19x CY15 P/E (from 19x FY15 P/E), which is +1.5SD of its historical trading band, given its lead position in the booming nitrile glove market as well as  its technologically-advanced and automated production lines. Maintain NEUTRAL.

Source: RHB