Hartalega - Higher Sales Volume Generated in 3QFY20

Date: 12/02/2020

Source  :  HLG
Stock  :  HARTA       Price Target  :  5.99      |      Price Call  :  HOLD
        Last Price  :  16.40      |      Upside/Downside  :  -10.41 (63.48%)

Hartalega’s 3QFY20 core PATAMI of RM115.8m (+12.0% QoQ, -8.7% YoY) brought 9MFY20 sum to RM315.2m (-14.1% YoY). The results came within our expectations but below consensus. Revenue was flattish (+0.1% YoY) as higher sales volume (+5.1% YoY) was offset by lower ASP (-4.4% YoY). Utilization rate declined slightly 86% (from 90% in 9MFY19). We maintain our forecasts; reiterate our HOLD call with unchanged TP of RM5.99. Our TP is derived from CY20 EPS and pegged to PE of 42x.

Within expectations. 3QFY20 core PATAMI of RM115.8m (+12.0% QoQ; -8.7% YoY) brought the 9MFY20 sum to RM315.2m (-14.1% YoY). The results came in within our expectations at 76.1% but below consensus at 69.7%.

Dividends. Declared second interim dividend of 1.8 sen per share going ex on 5th of March (3QFY19: 2.2 sen).

QoQ. Revenue of RM796.6m rose by +12.3% due to higher sales volume (+12.9%). However it was partially offset by a slight decline in ASP (-1.1%). Utilization rate improved to 96% (from 85%) due to the increase in demand. Consequently, EBITDA increased by +21.2% to RM247.3m whilst EBITDA margins improved by 2.2ppts (to 31.0%). This was mainly attributed to lower nitrile, chemicals, labour, and electricity costs. Higher volume led to lower cost per piece. Core PATAMI improved to RM115.8m (from RM103.4m) with lower effective tax rates of 23.8% (2QFY20: 24.1%).

YoY. Revenue improved by +10.1% attributed to increase in sales volume (+17.4%), but was pulled back slightly by lower ASP (-6.0%). EBITDA lifted by +38.9%, while its margin increased by 6.4ppts (from 24.6% to 31.0%). Core PATAMI declined by -8.7% due to higher depreciation and amortisation costs (+22.9%) and with higher effective tax rates of 23.8% compared to 20.4% in 3QFY19.

YTD. Revenue was flattish (+0.1% YoY) as higher sales volume (+5.1% YoY) was offset by lower ASP (-4.4% YoY). The average utilization rate decreased marginally to 86% (9MFY19: 90%). EBITDA was relatively flat (-0.3% YoY), mirroring topline. However, core PATAMI declined by 14.1% YoY as a result of higher depreciation and amortisation costs (+23.2%), and higher effective tax rates of 23.5% (9MFY19: 16.7%).

Outlook. Hartalega will continue with its NGC capacity expansion plans. First line of Plant 6 was commissioned in early January 2020, followed by a second line this week. In total Plant 6 will have an annual installed capacity of 4.7bn pieces once completed. Construction of Plant 7 has commenced and targeted commission of first line would be end of CY20. It will house an annual capacity of 3.4bn pieces once completed. With the progressive commissioning of Plant 6 and Plant 7, Hartalega’s annual installed capacity is expected to increase from the current 36.6bn to 44.7bn pieces by FY22.

Forecast. Maintain as the results were within expectations. While we expect increase in demand from the nCoV outbreak; we remain prudent by keeping pat our demand assumptions, as we can’t ascertain the actual quantum, and how long it will last at this juncture. In addition, we do not feel that ASP will pick up due to outbreak.

Maintain HOLD, TP: RM5.99. We maintain our HOLD call with unchanged TP of RM5.99. To recap we changed our valuations on all glove companies under our coverage to +1.5SD in our Strategy report (3rd Feb); Hartalega’s PE multiple was raised to 42x (from 31x), that increased our TP from RM5.10 to RM5.99.


Source: Hong Leong Investment Bank Research - 12 Feb 2020

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