PP7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts N o t e
MARKET DATELINE

1111
August
August
2010
2010

Hartalega Share Price

Fair Value
:
:
RM7.90
RM9.29
No Surprises Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (HARTA; Code: 5168) Bloomberg: HART MK

Net Core EPS Net
FYE Turnover Profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE NDY
Mar (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2010 571.9 143.1 59.1 59.1 286.6 13.4 - 5.4 net cash 47.0 1.9
2011f 700.3 173.1 71.5 71.5 21.0 11.1 72.0 3.9 net cash 41.0 2.3
2012f 897.4 202.5 83.6 83.6 16.9 9.5 84.0 3.0 net cash 35.7 2.6
2013f 1011.1 214.7 88.6 88.6 6.0 8.9 95.0 2.4 net cash 29.7 2.9
Main Market Listing /Non- Trustee Stock / Syariah-Approved Stock By The SC # Ex-EI * Consensus Based On IBES Estimates

♦ 1Q11 net profit jumped 57.1% yoy. Hartalega’s 1QFY03/11 net profit RHBRI Vs. Consensus
of RM41.5m (+57.1% yoy) came in within our and consensus Above
√ In Line √
expectations, accounting for 24% of our and consensus full-year
Below
estimates. As expected, no dividend was declared.
Issued Capital (m shares) 242.3
♦ 1Q revenue rose 4% qoq but net profit contracted by 10.8% qoq. Market Cap (RMm) 1,914.3
Qoq, revenue rose 4% as a result of an increase in sales volume as two Daily Trading Vol (m shs) 0.3
more new lines in Plant 5 were commissioned during the quarter. 2Q EBIT 52wk Price Range (RM) 4.70-8.43
margin, however, contracted by 3.1%-pts qoq largely due to: 1) the time Major Shareholders: (%)
lag in passing on the weakening US$ against RM (-3.8% qoq); and 2) Hartalega Industries 50.4
recognition of share-based payment expenses of RM1m during the quarter. Budi Tenggara 9.0

Hartalega was not really affected by the surge in latex prices as nitrile
prices have been rather stable given that its product mix is predominantly
FYE Mar FY11 FY12 FY13
nitrile gloves. Coupled with a higher effective tax rate of 22.9% (4Q09:
EPS chg (%) - - -
17.9%), net profit fell 10.8% qoq.
Var to Cons (%) (0.8) (0.5) (6.7)

♦ Capacity expansion. Commercial production for four new lines in the

newest plant, Plant 5, came onstream in 1HCY10. The company expects PE Band Chart
the remaining four lines would be commissioned and installed by Nov ’10.
PER = 11x
Hartalega also plans to decommission all ten of its lines in Plant 1 and PER = 9x
replace them with six new high capacity lines. This upgrade will effectively PER = 7x
PER = 5x
add another 1bn pieces to annual capacity and focus would be on the
production of powdered gloves in order to take advantage of the potential
surge in demand from emerging markets such as China and India. In total,
both Plant 5 and the upgrading works in Plant 1 would raise Hartalega’s
annual capacity to 10bn pieces from 7bn currently by FY12. Capex guided
by management is approximately RM120m over the next two years, which
will be funded internally and via borrowings. Relative Performance To FBM KLCI

♦ Risks. 1) higher-than-expected raw material prices, which may result in

margin contraction; and 2) appreciating RM against the US$. Hartalega

♦ Forecasts. We have kept our FY11-13 earnings forecasts unchanged for

now.
FBM KLCI

♦ Investment case. We maintain our fair value of RM9.29, which is based

on unchanged target FY11 PER of 13x. We like Hartalega for its niche
position as the largest nitrile glove producer in Malaysia and technological
capabilities that are well ahead of its competitors. No change to our
David Chong, CFA
Outperform call on the stock. (603) 92802179
david.chong@rhb.com.my
Please read important disclosures at the end of this report.

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 11 August 2010

Table 2. Earnings review

QoQ YoY
FYE Mar (RMm) 1Q10 4Q10 1Q11 Comments
(%) (%)
Revenue 125.3 163.4 170.0 4.0 35.6 Yoy growth on the back of capacity expansion
from the four new lines in Plant 5 while qoq
growth was largely due to the increase in sales
volume as two more new lines in Plant 5 were
commissioned in 1QFY11.

EBIT 33.6 57.4 54.4 (5.1) 61.9

Int exp (0.9) (0.8) (0.7) (18.3) (27.7) Total debt at end-1QFY11 was RM37.7m
(4QFY10: RM41.4m and 1QFY10: RM54.1m).
Pre-tax profit 32.7 56.6 53.8 (4.9) 64.4 Largely filtered down from EBIT level.
Tax (6.3) (10.1) (12.3) 21.8 95.0
MI 0.0 0.0 0.0 nm nm
Net profit 26.4 46.5 41.5 (10.8) 57.1

Margins (%)
EBIT 26.8 35.1 32.0 Yoy margin expansion due to: 1) better sales
mix; and 2) efficiency gains from the four new
lines in Plant 5.
Pre-tax 26.1 34.6 31.6
Effective tax rate 19.3 17.9 22.9 Effective tax rate remained lower than the
statutory rate due to availability of tax incentives.
Net profit 21.1 28.4 24.4
Source: Company data, RHBRI

Table 3: Earnings Forecasts Table 4: Forecast Assumptions

FYE Mar (RMm) FY10a FY11F FY12F FY13F FYE Mar FY11F FY12F FY13F

Turnover 571.9 700.3 897.4 1,011.1 Average capacity (m pcs) 7,668.6 10,000.0 10,000.0
Turnover growth (%) 256.8 22.4 28.2 12.7 Utilisation rate (%) 81.6 81.5 83.9
Average selling price (per’000 111.88 110.13 120.48
pcs)
EBITDA 192.9 231.9 269.1 284.5 Source: RHB estimates
EBITDA margin (%) 33.7 33.1 30.0 28.1

Dep. & amort. (11.5) (12.7) (13.3) (13.9)

EBIT 181.3 219.1 255.8 270.6

EBIT margin (%) 31.7 31.3 28.5 26.8
Net interest expense (3.4) (2.5) (2.5) (2.0)
Associates 0.0 0.0 0.0 0.0
Exceptionals 0.0 0.0 0.0 0.0
Pretax Profit 177.9 216.6 253.3 268.6
Tax (34.7) (43.3) (50.7) (53.7)
Minorities (0.2) (0.1) (0.1) (0.1)

Net Profit 143.1 173.1 202.5 214.7

Core Net Profit 143.1 173.1 202.5 214.7
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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