Review

• Hartalega’s 9MFY17 net profit declined by 1.2% YoY to RM193.6mn. However, excluding foreign exchange losses arising from the revaluation of USD denominated loans and losses on derivatives amounting to RM39.7mn, core net profit increased by 9.4% YoY to RM233.3mn, above ours and consensus estimates at 86.1% and 82.7% respectively. The deviation was due to the QoQ improvements in operating efficiency and strengthening of the USD against the Ringgit in 3QFY17.

• YoY, 9MFY17 revenue and adjusted PBT respectively increased by 18.0% to RM1.3bn and 2.4% to RM269.9mn. The robust revenue growth was mainly on the back of a 24.2% YoY growth in sales volume. Whereas, the softer bottom line growth was mainly due to more competitive pricing and the increase in energy costs which contributed to the decline in adjusted PBT margins by 3.2%-points YoY to 20.8%.

• QoQ, core net profit grew by 27.1% to RM95.4mn, outpacing revenue growth of 4.4% to RM456.3mn. The strong performance was due to reduced operating overheads, greater operating efficiency and the strengthening of the USD against the Ringgit which together expanded adjusted PBT margins by 3.5%-points QoQ to 23.6%. While sales volume grew marginally by 0.3% QoQ with Plant 3 of the NGC still fresh in its early stages of commissioning, average selling prices in Ringgit increased by 4.4% QoQ on the back of the strengthening of the USD against the Ringgit.

• A second interim dividend of 2.0sen was declared, bringing YTD dividends to 4.0sen and unchanged from the previous corresponding period.

Impact

• Adjusting our cost assumptions on the back of the group’s improved operating efficiency, we tweak our FY17/FY18/FY19 earnings by +10.2%/+1.9%/3.2% to RM298.5mn/RM348.9mn/RM414.9mn.

Outlook

• Looking ahead, we expect earnings to be underpinned by new capacity from Plant 3 of the NGC in Sepang. At a commissioning pace of one production line per month, 6 production lines at Plant 3 are expected to be up and running by the end of 4QFY17 which we estimate to translate into circa 9% QoQ growth in the group’s overall installed capacity to 24.3bn per annum.

• While the competitive pressures endured since early 2016 appears to be easing, right now, managing fluctuations in the USD/Ringgit and key inputs, nitrile butadiene rubber (NBR), is of upmost importance as volatitility in these factors is disruptive to profitability. Nonetheless, in view of the rapid rise in price of NBR, management has alluded of its continuous attention to its trend and will renegotiate pricing with its customers to pass through further increases, albeit with a time lag.

Valuation

• Our TP for Hartalega is raised to RM4.50/share (previously RM3.95/share) based on a higher PE multiple of 22.0x (previously 20.0x) against CY17EPS. The higher PE multiple ascribed is closely aligned to its 5-year average PE multiple of 22.2x, which we believe is justified considering the strong operational improvements the group have displayed. However, we reiterate our SELL recommendation on the stock as it is fairly valued at this juncture.

Source: TA Research - 15 Feb 2017