Hartalega’s FY15 results were in line with our and consensus estimates at 98.4% and 97.4% respectively. We maintain our NEUTRAL recommendation with an unchanged DCF-based TP of MYR8.48, which represents a 3% upside. While the company’s capacity expansion is on track, it has incurred higher start-up expenses related to its NGCinitiative.

• FY15 (Mar) earnings were in line with our and consensus estimatesat 98.4% and 97.4% respectively. Revenue increased 3.5% YoY, ledby higher sales volume. Earnings fell 9.9% YoY, though, due to lower ASPs, higher Next Generation Complex (NGC) start-up expenses, andincreased electricity and natural gas cost during the year. Hartalega also incurred a MYR3.1m write-off for its Plant 1 in Bestari Jaya in 4QFY15.Nevertheless, on a QoQ basis, earnings rose 10.9% on higher sales volume, the strengthening of the USD and lower raw material prices.
• NGC capacity expansion on track. This is with the commissioning of eight production lines up to April, an average of two lines per month. Management expects further production lines to come on stream progressively throughout the year. We expect Hartalega to increase its capacity to 23.5bn pieces by FY16 from 15.8bn currently.
• NGC-related expenses. Hartalega incurred MYR14m of NGC start-up related expenses (eg hiring of labour in advance) in FY15 and guided that NGC operations should turn profitable in 2QFY16. It also recognized MYR4m of NGC losses as deferred tax assets, contributing to a lower tax rate for 4QFY15.
• Risks and forecasts. Although management is concerned that heightened competition could lead to lower ASPs, Hartalega is confident that the increased capacity and greater technological competencies in itsNGC expansion will help sustain both topline and bottomline.
• Maintain NEUTRAL. Although Hartalega’s growth prospects remain intact, we believe that much of the positive news has been priced in at current price levels. Furthermore, the company may grapple with higher start-up expenses related to its NGC in the medium term. As such, we reiterate our NEUTRAL call with an unchanged TP of MYR8.48 (capital asset pricing model: 8.9%, TG: 2%). Our TP has an implied FY16F P/E of 21.9x, which is at its historical 2SD trading band of 22x while its peers are trading at an average of 14.7x.