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Results Review

(Member of Alliance Bank group) PP7766/03/2013 (032116)

Hartalega Holdings
Glove

Neutral

7 August 2013
Analyst Ian Wan ianwwk@alliancefg.com +603 2604 3919

Bloomberg Ticker: HART MK | Bursa Code: 5168

1QFY14: A slow start


Hartalega made a slow start to FY14, with annualised 1QFY14 core earnings making up 90.2% and 95.4% of house and consensus full year estimates. We anticipate earnings growth to pick up in the remaining quarters, underpinned by new production capacity from Plant 6 (completed in July 2013). However, we believe recent strong share price performance has largely priced in the positives mentioned above. With no near term positive catalysts insight, we take this opportunity to downgrade Hartalega from buy to NEUTRAL, with a higher TP of RM6.84 (+0.4%), based on 18x 12-month forward P/E. Although we remain positive on Hartalegas long-term prospect, we foresee limited upside from current share price.

12-month upside potential Previous target price Revised target price Current price (as at 6 Aug) Capital upside (%) Net dividends (%) Total return (%)

6.80 6.84 6.79 0.8 2.5 3.3

A slow start but expected to catch up in the remaining quarters


Key stock information Syariah-compliant? Market Cap (RM m) Shares outstanding (m) Free float (%) 52-week high / low (RM) 3-mth avg volume ('000) 3-mth avg turnover (RM m) Share price performance 1M Absolute (%) 4.6 Relative (%) 3.9 Yes 5,017.1 738.9 37.9 6.80 / 4.16 796.6 4.9

3M 20.5 19.3 6M 48.4 34.2

Share price chart

Hartalegas 1QFY14 results came in largely within expectation, with annualised core net profit making up 90.2% and 95.4% of ours and consensus full year forecasts. We believe the earnings growth will pick up in the remaining quarters, as Plant 6 was fully completed only in July 2013, increasing overall group capacity by 30%. 1QFY14 revenue grew by 12.2% y-o-y and 3.1% q-o-q, underpinned by higher sales volume (+22.8% y-o-y, +5.2% q-o-q) which was partially offset by lower ASP (-10.4% y-oy, -0.4% q-o-q) due to softer latex cost (-33.0% y-o-y, -17.7% q-o-q). 1QFY14 sales volume represents 22.8% of our full year estimates. In terms of absolute core PBT, the group achieved RM29.2 per thousand gloves in 1QFY14 (-4.6% y-o-y, -4.3% q-o-q), mainly due to :- (1) Volatile foreign exchange rate during the quarter with high and low hitting RM3.22 and RM2.96/USD, although the average exchange rate recorded only -0.2% q-o-q, and (2) Stiffer price competition. Nonetheless, this is in line with our full year estimates of RM29.5 per thousand gloves for FY14 As usual, no dividend declared during the first quarter of the financial year.

Nitrile gloves still enjoy cost advantage of more than 24% in Aug 2013
Going forward, Hartalega anticipates global demand for nitrile gloves to remain stronger than natural rubber (NR) gloves. Based on our estimate, nitrile gloves cost advantage against NR glove has widened from 17% in April 2013 to 24% in Aug 2013. Apart from that, Hartalega plans to manufacture specialty gloves, and thus, expanding and enhancing its product mix. This expansion is expected to be carried in concurrent with NGC (next-generation glove manufacturing complex) project. We currently do not build in any earnings contribution from this expansion yet. In terms of product innovation, Hartalega has invented and patented new coating products, called Coats, which it expects will create new niche market in healthcare, and potentially in the beauty and cosmetic sectors. This oatmeal glove is so far the only lab-proven anti-bacterial glove that is capable of moisturising the skin to make it soft and supple, which appears to be a value-added service in the healthcare industry. On foreign shareholdings level, it has increased from 15.9% in April 2013 to 16.3% in July 2013. Lastly, management has also revealed that the group will appoint one of the top 4 audit firms, Deloitte & Touche as a replacement to its existing external auditors, Baker Tilly.

Forecasts unchanged
As results came within expectation, we leave our forecasts unchanged.

All required disclosure and analyst certification appear on the last two pages of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission

Results Review | Hartalega Holdings | 13 August 2013

Downgrade to NEUTRAL with a higher TP of RM6.84 (+0.4%)


Hartalegas share price has performed very well, appreciating 39% since our upgrade on 7 Nov 2012. Although we remain positive on Hartalegas long term prospect s, underpinned by its strong competitive advantage (superior profitability) and potential game-changing NGC project which will drive its earnings growth from FY15 onwards, we believe current share price has largely priced in the positives mentioned above, at least for the next 12 months. With no near term positive catalysts insight, we downgrade the stock from buy to NEUTRAL, with a higher TP of RM6.84 (+0.4%) as we roll forward our 12-month forward valuation (Aug 2013-July 2014) with an unchanged target P/E of 18x. Key risks include delay in capacity expansion, especially the NGC plant.

Results Review | Hartalega Holdings | 13 August 2013

SNAPSHOT OF FINANCIAL RESULTS


Figure 1 : Results commentaries % y-o-y % q-o-q change change 12.2 3.1

1QFY14 Key financial highlights Revenue (RM m) 278.0

1QFY13 247.7

Comments 1QFY14 revenue growth was mainly driven by sales volume growth (+22.8% yo-y and +5.2% q-o-q) which was partially offset by lower ASP (-10.4% y-o-y and -0.4% q-o-q) as latex cost eased.

Operating profit (RM m) Pretax profit (RM m) Net profit (RM m) Core profit (RM m)

81.8 81.9 62.9 62.9

70.0 69.9 53.4 53.4

16.8 17.2 17.9 17.9

0.5 0.7 1.0 0.9

Q-o-q core net profit growth came in weaker than top line, mainly due to (1) volatile foreign exchange rate during the quarter (RM2.96-3.22/ USD), and (2) stiffer price competition.

Per share data EPS (sen) Core EPS (sen) Net DPS (sen) BV/share (RM) Margins Pretax (%) Core profit (%) Other highlights Utilisation rate (%) Sales volume (bn pieces)

8.6 8.6 1.10

7.3 7.3 0.89

17.2 17.2

0.5 0.4

Annualised core EPS represents 90.2% and 95.4% of ours and consensus full year forecasts.

29.5 22.6

28.2 21.5

91.2 2.8

89.5 2.3

22.8

5.2

ASP (RM/ k gloves) Average blended latex price (RM/kg) Absolute core PBT/k gloves (RM) USD:MYR

96.9 7.8 29.2

108.1 11.7 30.6

-10.4 -33.0 -4.6

-0.4 -17.7 -4.3

Utilisation rate remains high at 91%. 1QFY14 sales volume represents 22.8% of our full year estimate. We expect volume to pick up in the remaining quarters as plant 6 (+30% capacity) fully completed in July 2013. ASP declined due to lower input cost.

3.08

3.12

-1.4

-0.2

Absolute core PBT per thousand gloves contracted by 4.6% y-o-y and 4.3% qo-q, implying stiffer price competition. Nonetheless, this is within our expectation. USD against Ringgit has been very volatile during the quarter with the high and low hitting RM3.22/USD and RM2.96/USD respectively, although the average exchange rate for the quarter implying another way, which is -0.2% qo-q.

Source: Company, Alliance Research

Results Review | Hartalega Holdings | 13 August 2013


Figure 2 : Key financial data FYE 31 March Revenue (RM m) EBITDA (RM m) EBIT (RM m) Pretax profit (RM m) Reported net profit (RM m) Core net profit (RM m) EPS (sen) Core EPS (sen) Alliance / Consensus (%) Core EPS growth (%) P/E (x) EV/EBITDA (x) ROE (%) Net gearing (%) Net DPS (sen) Net dividend yield (%) BV/share (RM) P/B (x)
Source: Alliance Research, Bloomberg

FY12 931.1 288.2 259.2 258.4 201.4 201.4 27.6 27.6 5.4 24.6 8.0 32.5 Net cash 12.5 1.8 0.85 8.0

FY13 1,032.0 336.2 299.4 304.1 233.3 233.4 31.9 31.9 15.4 21.3 14.0 30.6 Net cash 11.0 1.6 1.04 6.5

FY14F 1,263.5 408.9 363.3 363.7 279.1 279.1 37.4 37.4 105.8 17.3 18.1 12.1 27.4 Net cash 16.8 2.5 1.37 5.0

FY15F 1,368.6 447.6 386.2 386.8 296.8 296.8 38.9 38.9 101.8 3.8 17.5 11.6 24.1 Net cash 17.5 2.6 1.61 4.2

FY16F 1,741.1 550.5 476.2 477.2 366.1 366.1 46.5 46.5 108.8 19.6 14.6 9.6 23.1 Net cash 20.9 3.1 2.01 3.4

Figure 3 : Nitrile butadiene rubber cost advantage widens to 24% vs natural rubber in Aug 2013
Nitrile rubber cost premium/ (discount) to natural rubber
110.0% 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0%
0.0%

May-08

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

May-05

May-06

May-07

May-09

May-10

May-11

May-12

Sep-12

-10.0% -20.0% -30.0% -40.0% -50.0%

*Adjusted for latex content for nitrile butadiene rubber (45%) and natural rubber (60%). Source: Bloomberg data, Alliance Research

May-13

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Results Review | Hartalega Holdings | 13 August 2013


Figure 4 : Hartalega P/E Band
PE BAND

Figure 5 : Hartalega P/B Band


PB BAND

Price
7.50 7.10 6.70 6.30 5.90 5.50 5.10 4.70 4.30 3.90 3.50 3.10 2.70 2.30 1.90 1.50 1.10 0.70 0.30
Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13

Price
7.50 7.10 6.70 6.30 5.90 5.50 5.10 4.70 4.30 3.90 3.50 3.10 2.70 2.30 1.90 1.50 1.10 0.70 0.30

Feb-09 Apr-09

Feb-12

Aug-08

Aug-09

Aug-10

Aug-12

Aug-11

Feb-13 Apr-13

Feb-10 Apr-10

Feb-11 Apr-11

Oct-08

Oct-09

Oct-12

Oct-10

Oct-11

Jun-09

Jun-10

Jun-12

Dec-08

Dec-09

Apr-12

Min: PER 3.1 x

-1Std: PER 7.0 x

Avg: PER 10.9 x

+1Std: PER 15.1 x

Max: PER 19.4 x

Min: 0.9

-1Std: 1.9

Avg: 2.96

+1Std: 3.9

Dec-12

Dec-10

Dec-11

Source: Bloomberg data, Alliance Research

Source: Bloomberg data, Alliance Research

Figure 6 : Quarterly sales volume growth


Nitrile glove 3.000 NR glove 12.2% Overall q-o-q growth 14.0% 11.9% 12.0% 10.0% 8.0% 5.8% 4.1% 7.9% 6.0% 5.2% 4.0% 2.0% 0.0% -2.0% -4.0%

Figure 7 : Quarterly capacity utilisation rate


Annualised capacity (bn pieces) Utilisation rate

14.000
12.000 10.000 8.000 6.000

2.500
2.000 1.500 1.000 0.500 7.6%

9.3%

2.4%
0.5% -1.7%

2.3%

4.000
2.000 -

1QFY11

1QFY12

1QFY13

1QFY14

2QFY11

3QFY11

4QFY11

2QFY12

3QFY12

4QFY12

2QFY13

3QFY13

4QFY13

92.0% 91.0% 90.0% 89.0% 88.0% 87.0% 86.0% 85.0% 84.0% 83.0% 82.0% 81.0% 80.0% 79.0% 78.0%
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

Source: Company data, Alliance Research

Source: Company data, Alliance Research

Figure 8 : 1QFY14 revenue breakdown by product


NR glove, 6.7%

Figure 9 : 1QFY14 revenue breakdown by market


Oceania, 2.2% Asia, 10.6% ROW, 0.2%

Europe, 29.6% N.America, 54.0%


Nitrile glove, 93.3%

S.America, 3.5%

Source: Company data, Alliance Research

Source: Company data, Alliance Research

Jun-13

Jun-11

Max: 4.8

Results Review | Hartalega Holdings | 13 August 2013

DISCLOSURE
Stock rating definitions
Strong buy Buy Neutral Sell Trading buy High conviction buy with expected 12-month total return (including dividends) of 30 or more Expected 12-month total return of 15 or more Expected 12-month total return between -15 and 15 Expected 12-month total return of -15 or less Expected 3-month total return of 15 or more arising from positive newsflow. However, upside may not be sustainable

Sector rating definitions


Overweight Neutral Underweight - Industry expected to outperform the market over the next 12 months - Industry expected to perform in-line with the market over the next 12 months - Industry expected to underperform the market over the next 12 months

Commonly used abbreviations


Adex = advertising expenditure bn = billion BV = book value CF = cash flow CAGR = compounded annual growth rate Capex = capital expenditure CY = calendar year Div yld = dividend yield DCF = discounted cash flow DDM = dividend discount model DPS = dividend per share EBIT = earnings before interest & tax EBITDA = EBIT before depreciation and amortisation EPS = earnings per share EV = enterprise value FCF = free cash flow FV = fair value FY = financial year m = million M-o-m = month-on-month NAV = net assets value NM = not meaningful NTA = net tangible assets NR = not rated p.a. = per annum PAT = profit after tax PBT = profit before tax P/B = price / book ratio P/E = price / earnings ratio PEG = P/E ratio to growth ratio q-o-q = quarter-on-quarter RM = Ringgit ROA = return on assets ROE = return on equity TP = target price trn = trillion WACC = weighted average cost of capital y-o-y = year-on-year YTD = year-to-date

Results Review | Hartalega Holdings | 13 August 2013

DISCLAIMER
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