HARTALEGA HOLDINGS

(HART MK, HTHB.KL)

7 August 2013

1QFY14: Challenged by forex and pricing pressures

Company report
Cheryl Tan cheryl-tan@ambankgroup.com +603 2036 2333
Price Fair Value 52-week High/Low Key Changes Fair value EPS YE to Mar Revenue (RMmil) Core net profit (RMmil) FD EPS (Sen) FD EPS growth (%) Consensus EPS (Sen) DPS (Sen) FD PE (x) EV/EBITDA (x) Div yield (%) ROE (%) Net Gearing (%) Stock and Financial Data Shares Outstanding (million) Market Cap (RMmil) Book value (RM/share) P/BV (x) ROE (%) Net Gearing (%) Major Shareholders Free Float (%) Avg Daily Value (RMmil) Price performance Absolute (%) Relative (%)
8.00

HOLD
(Maintained)
Rationale for report: Company Result

RM6.79 RM6.00 RM6.80/RM4.25 Unchanged Unchanged FY13 1,032.0 234.7 31.7 16.1 31.7 14.3 21.2 15.7 2.1 33.9 n/a FY14F 1,213.5 257.4 32.0 10.1 34.8 15.0 21.2 14.8 2.2 33.6 18.4 FY15F 1,336.7 280.1 34.8 8.9 38.1 16.0 19.5 12.7 2.4 33.2 8.1 FY16F 1,646.5 350.8 43.6 25.2 43.9 21.5 15.6 10.6 3.2 34.5 21.5

Investment Highlights

We are maintaining our HOLD rating on Hartalega Holdings with an unchanged fair value of RM6.00/share following the release of its 1QFY14 results. Hartalega kicked off the year with sequentially softer net profit of RM63mil (+1% QoQ; +18% YoY) on the back of a higher turnover of RM278mil (+3% QoQ; +12% YoY). The group would have registered a better bottomline growth of 12% QoQ and 26% YoY to reach RM69mil were it not for the higher volatility in the USD:RM exchange rate during the period (1QFY14: +2.2%) which resulted in total forex losses of RM6.2mil. Note that this is the largest forex loss it has booked in the last six quarters despite the higher USD appreciation of 4% in 1QFY13. Stripping out the exceptional loss, the results came in line with our recently downgraded earnings forecast. To recap, we had cut our FY14F and FY15F earnings by 14% and 26% in the last quarter as we anticipate a weakening of the groups earnings momentum from 2QFY14F onwards following headwinds in the form of capacity constraints (CY13-14: +2% vs peers 3%) and declining ASP (-8% for FY14F). In view of the sustained growth in demand for nitrile gloves (FY14F: >20%), Hartalegas new output from lines 7-9 of Plant 6 (~1.2bil pcs) have been easily absorbed, translating into higher revenues for the group. Sales volumes for the quarter had improved by 5% QoQ and 23% YoY. However, with only contribution from one new line remaining (line 10 of Plant 6 commissioned in July) and reduction of orders from one of its three main customers (~45% of total sales) due to pricing pressures, we foresee decelerating sales volume growth moving forward. In 1QFY14, easing nitrile prices (-17% QoQ) as well as greater line speeds have reduced Hartalegas cost per glove to 6.6sen (vs 1QFY13s 7.7sen), lifting its EBITDA margin (ex-EI) nearer to its historical average of 32%. As usual, no dividends were declared in Hartalegas first quarter results. Last week, the group had proposed a final single tier dividend of 4 sen/share, bringing total dividends for FY13 to 14.5 sen/share. With Hartalegas share price having appreciated strongly over the past few months (YTD: +43%), its yields have compressed to an average of 2.2% for FY14F-FY16F. Management has indicated that it will only review its payout ratio (currently a minimum of 45%) closer to FY16F - when its NGC expansion takes flight. At current price levels, we deem Hartalegas valuations to be steep. It is trading at a PE of 19x-21x its fully-diluted FY14F-FY15F EPS, ~3SD above its 3-year mean of 12x. Our fair value is based on an unchanged target PE of 17x its fully-diluted FY15F earnings.

738.9 5,017.1 0.95 7.1 33.9 n/a Hartalega Industries Sdn Bhd (50.1%) Budi Tenggara (4.9%) 38.0 5.0 3mth 28.0 24.0 6mth 50.0 40.5
1,901

12mth 51.4 42.2

6.00

1,694

Index Points

(RM)

4.00

1,487

2.00

1,280

0.00
Feb-11 Aug-11 Feb-09 Feb-10 Feb-12 Feb-13 Aug-08 Aug-09 Aug-10 Aug-12 Aug-13

1,074

Hartalega

FBM KLCI

PP 12247/06/2013 (032380)

Hartalega Holdings

7 August 2013

TABLE 1: RESULTS SUMMARY

Mar YE (' mil) Revenue Operating expenses EBITDA Depreciation and amortisation EBIT Interest income Interest expense Other income Pre-exceptional Profit EIs Pre-associates profit Associates Pre-tax profit Taxation Minorities Net Profit Core net profit (ex EI)
Source: Company, AmResearch

4Q13 269.8 (190.1) 79.3 (9.4) 70.0 0.2 (0.2) 10.9 81.0 0.4 81.3 0.0 81.3 (18.9) (0.1) 62.3 61.9

1Q14 278.0 (191.9) 92.3 (10.5) 81.8 0.3 (0.1) 6.2 88.1 (6.2) 81.9 0.0 81.9 (18.9) (0.1) 62.9 69.1

%QoQ 3.1

1Q13 247.7 (177.6) 71.5 (7.3) 64.2 0.2 (0.3) 7.1 71.3 (1.3) 69.9 0.0

1Q14 278.0 (191.9) 92.3 (10.5) 81.8 0.3 (0.1) 6.2 88.1 (6.2) 81.9 0.0 81.9 (18.9) (0.1) 62.9 69.1

%YoY 12.2

16.3

29.1

0.7

69.9 (16.5) (0.1) 53.4 54.7

17.2

1.0 11.6

17.9 26.4

AmResearch Sdn Bhd

7 August 2013

+1

Avg

-1

Aug-13 May-13 Feb-13

CHART 2 : PE BAND CHART

Nov-12 Aug-12 May-12 Feb-12 Nov-11 Aug-11 May-11 Feb-11 Nov-10 Aug-10

22.0

20.0

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

CHART 1 : PB BAND CHART

2.0

May-13 Feb-13 Nov-12 Aug-12 May-12 Feb-12 Nov-11 Aug-11 May-11 Feb-11 Nov-10 Aug-10 May-10 Feb-10 Nov-09 Aug-09 May-09 Feb-09 Nov-08 Aug-08

Hartalega Holdings

8.0

6.6

5.2

3.8

2.4

1.0

AmResearch Sdn Bhd

(x)

(x)

Hartalega Holdings

7 August 2013

TABLE 1 : FINANCIAL DATA

Income Statement (RMmil, YE 31 Mar) Revenue EBITDA Depreciation Operating income (EBIT) Other income & associates Net interest Exceptional items Pretax profit Taxation Minorities/pref dividends Net profit Core net profit Balance Sheet (RMmil, YE 31 Mar) Fixed assets Intangible assets Other long-term assets Total non-current assets Cash & equivalent Stock Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders funds Minority interests BV/share (RM) Cash Flow (RMmil, YE 31 Mar) Pretax profit Depreciation Net change in working capital Others Cash flow from operations Capital expenditure Net investments & sale of fixed assets Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Others Cash flow from financing Net cash flow Net cash/(debt) b/f Net cash/(debt) c/f Key Ratios (YE 31 Mar) Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rate (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) Source: Company, AmResearch estimates 2012 931.1 288.2 (29.0) 259.2 0.0 (0.8) 0.0 258.4 (57.0) (0.1) 201.4 201.4 2012 370.3 0.0 9.9 380.2 163.2 97.5 107.7 9.5 377.9 29.5 12.6 43.4 85.5 12.1 40.5 52.6 619.5 0.6 0.77 2012 258.4 29.0 (44.5) (42.6) 200.3 (35.4) 0.1 (24.8) (60.1) (14.6) 0.0 (87.4) 6.9 (95.0) 45.2 117.0 163.2 2012 26.7 7.5 27.8 21.6 149.3 22.0 45.3 40 32 13 2013 1,032.0 337.9 (31.9) 305.9 0.0 (0.1) 0.0 305.9 (70.8) (0.3) 234.7 234.7 2013 485.8 6.9 49.8 542.5 182.4 86.6 119.9 4.8 393.8 56.2 7.7 51.2 115.0 4.5 50.3 54.8 765.5 1.0 0.95 2013 305.9 31.9 35.7 (56.3) 317.2 (18.2) 0.0 (175.9) (194.0) (12.5) 0.0 (98.8) 7.3 (104.0) 19.2 163.2 182.4 2013 10.8 17.2 29.6 22.7 338.8 23.2 45.2 40 33 15 2014F 1,213.5 382.5 (43.2) 339.4 0.0 (4.0) 0.0 335.3 (77.6) (0.3) 257.4 257.4 2014F 670.6 0.0 49.6 720.3 56.1 141.1 172.6 9.5 379.4 26.7 84.3 42.7 153.6 144.3 35.6 179.9 765.5 0.6 0.95 2014F 335.3 43.2 (136.7) (77.6) 164.2 (300.0) 0.1 (30.0) (329.9) 114.0 0.0 (111.2) 0.0 2.8 (162.9) 218.0 56.1 2014F 17.6 13.2 27.6 21.2 56.4 23.2 46.9 44 34 12 2015F 1,336.7 437.7 (59.8) 378 0.0 (11.2) 0.0 366.6 (86.2) (0.3) 280.1 280.1 2015F 839.6 0.0 49.6 889.2 266.8 95.4 149.6 9.5 521.4 63.0 128.2 42.7 233.8 219.5 35.9 255.3 920.9 0.6 1.14 2015F 366.6 59.8 105.0 (86.2) 445.3 (200.0) 0.1 (30.0) (229.9) 119.0 0.0 (124.7) 0.0 (5.7) 209.7 56.1 266.8 2015F 10.2 14.4 27.4 21.0 26.2 23.5 46.0 44 32 12 2016F 1,646.5 546.0 (75.0) 470.9 0.0 (17.9) 0.0 453.1 (101.9) (0.3) 350.8 350.8 2016F 1,044.3 0.0 49.6 1,093.9 163.7 194.1 247.3 9.5 614.7 46.8 172.4 42.7 261.8 296.2 35.2 331.4 1,114.8 0.6 1.39 2016F 453.1 75.0 (212.5) (101.9) 213.6 (250.0) 0.1 (30.0) (279.9) 119.0 0.0 (156.9) 0.0 (37.9) (104.1) 266.8 163.7 2016F 23.2 24.7 27.5 21.3 23.1 22.5 49.3 44 32 12

AmResearch Sdn Bhd

Hartalega Holdings

7 August 2013

Anchor point for disclaimer text box

Published by AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: ( 0 3 ) 2 0 7 0 - 2 4 4 4 ( r e s e a r c h ) Fax: (03)2078-3162 Printed by AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: ( 0 3 ) 2 0 7 0 - 2 4 4 4 ( r e s e a r c h ) Fax: (03)2078-3162

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd

Benny Chew Managing Director

AmResearch Sdn Bhd