Hartalega Holdings - 9MFY13 within expectations

Period    9MFY13

Actual vs. Expectations    The reported 9MFY13 net profit of RM172m accounted for 75% of ours and the consensus full year net profit forecasts.

Dividends   The company has declared a second single-tier interim dividend of 3.5 sen per share. This brings 9MFY13 total dividends to 7.0 sen per share. 

Key Results Highlights   QoQ, the 3QFY13 revenue rose 1.8% due to the higher sales volume (+7%) in the nitrile glove segment, which accounted for 94% of the total sales. However, this was offset by a 6% decrease in nitrile gloves ASPs. During the quarter, the utilisation rate remained unchanged at 90.6%. Despite the same utilisation rate achieved, the 3QFY13 volume sales were higher due to the commercial production of three lines from plant 6. Meanwhile, despite stiff competition, the EBITDA margin still managed to improve marginally from 32.9% to 33.3% due to the lower raw material prices i.e. nitrile and natural latex. However, we believe that the further margin improvement may not be sustainable in the subsequent quarters as other players are likely to ramp up the production of their own nitrile gloves leading to higher competition and also due to a higher production cost caused by the high energy prices and the minimum wage policy.

 YoY, the revenue and net profit jumped 7% and 19% respectively due to 1) a higher utilisation rate of 90.6% compared to 85.0% in 3QFY12; 2) higher volume salesfrom new capacity expansion; and 3) the easing of raw material prices. 

Outlook   Plant 6 will have 10 production lines for nitrile gloves at 40,000 pieces/hour/line, 14% more than the current ones. This will bring the total production capacity in Plant 6 to 3.5b pieces p.a. when it is fully completed in 2013. To date, we understand that five production lines have already been commissioned. The first line commenced production in September 2012 while the other two lines are believed to have started commercial production in mid-3QFY12. The remaining two lines are expected to contribute to 4QFY13 earnings. The construction of the balance five lines is expected  by June 2013 to complete the entire production line.

 Going forward, we understand that Hartalega has raised its nitrile glove ASPs by 2-3% to mitigate the effect of the minimum wage policy. We had already factored these revised ASPs into our earnings model. 

Change to Forecasts     No changes to our forecasts. 

Rating     Maintain MARKET PERFORM

Valuation    Hartalega’s growth trajectory is already reflected in its current valuation levels. The stock is currently trading at 14x CY13 EPS vs. its average net profit growth of 13.0%, which is already quite fair. Our fair value  of RM5.12 is based on 15x CY13 EPS.

Risks   (i) Lower utilisation rate (ii) a squeeze in margin & (iii) fluctuations in the ringgit and commodity prices.

Source: Kenanga