Hartalega’s  1QFY15  earnings  were  within  our  expectations  but  below consensus  forecast. Revenue was flat despite higher sales volume  dueto  reduced  ASP.  Margin  was  weaker  y-o-y  due  to  higher  operating expenses,  but slightly improved q-o-q  on  better operational efficiency. We  expect  a  flat  FY15F  but  stronger  growth  in  FY16F.  Maintain NEUTRAL and MYR6.95 FV.

Within expectations. Hartalega’s 1QFY15 core  earnings of  MYR58.2m (+26.2% q-o-q, -18.4%  y-o-y) came in within our expectations  but below street’s estimates. As expected, the topline growth  was flattish  (-0.4% qo-q, +0.4% y-o-y)  despite  higher  sales volume, due to weaker  average selling price (ASP). Hartalega’s net margin improved  4.4ppts q-o-q due to a reduction in maintenance costs and production consumables arising from better operational efficiency. However, net margin eased by 4.8ppts on  a  y-o-y basis  due to  a reduction in ASP and  increases  in electricity tariff, natural gas tariff and maintenance costs.

Positive outlook.  Management is confident that the additional capacity will  be  met  by  strong  demand  for  nitrile  gloves,  as  users  switch  from natural rubber latex to nitrile rubber gloves. Management also guides  for lower  ASP  led  by  declining  raw  material  prices  and  increasing  price competition.  However,  it  believes  that  lower  ASP  coupled  withsustainable  demand  growth  may  create  sales  opportunities  in  new markets.

Expecting stronger growth in FY16.  As highlighted earlier, we project a flat FY15F but expect a 32% y-o-y earnings growth for FY16F, with the additional  annual  capacity  of  8bn  pieces  by  FY16F  (from  14bn  pieces per annum  in FY14) as the main growth driver.  We take  a conservative stance  in  our  FY16F  projections,  ie  a  6.8%  drop  in  ASP,  an  84% utilisation rate and a 19.7% net margin (vs 21% in FY14).

Maintain NEUTRAL. We make no changes to our earnings forecast andkeep our NEUTRAL stance on Hartalega at this juncture. W e believe the company  is on the track  for a  new growth wave in  the  near future,  withthe  first  two  lines  of  its  next-generation  complex  (NGC)  set  to  come onstream by year-end. Our FV is maintained at MYR6.95, pegged to 19x CY15 EPS.

Source: RHB