Hartalega RM6.79 - BUY Financials Year to 31 March 12A 13A 14CL 15CL 16CL Revenue (RMm) 931 1,032 1,158 1,303 1,520 Rev forecast change (%) - - (3.2) (1.8) (3.1) Net profit (RMm) 201 235 267 299 325 NP forecast change (%) - - 1.2 3.2 1.5 EPS (sen) 27.7 32.2 34.9 39.1 44.7 CL/consensus (13) (EPS%) - - 101 103 104 EPS growth (% YoY) 5.7 16.6 8.4 11.8 14.4 PE (x) 24.5 21.1 19.4 17.4 15.2 Dividend yield (%) 1.8 2.1 2.4 2.7 3.0 ROE (%) 36.1 34.3 32.5 30.5 28.3 Net debt/equity (%) (22.3) (15.0) (10.3) (6.9) (5.5) Source: CLSA Find CLSA researc h on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com Indar Dhaliwal [email protected]+60(3)20567826 7 August 2013 Malaysia Healthcare Reuters HTHB.KL Bloomberg HART MK Priced on 6 August 2013 KLSE C omp @ 1,78 4.6 12M hi/lo RM6.85/4.21 12M price target RM8.00 ±% potential +18% Shares in issue 484.5m Free float (est.) 44.5% Market cap US$1,556m 3M average daily volume RM4.7m (US$1.5m) Major shareholders Harta lega Industrie s 55.5% Stock performance (%) 1M 3M 12M Absolute 4.6 28.1 52.6 Relative 3.9 25.8 40.2 Abs (US$) 3.2 20.3 47.6 0 50 100 150 200 250 2.4 3.5 4.6 5.7 6.8 Aug- 11 Fe b-12 Aug- 12 Feb-13 Hartalega (LHS) Rel to Comp (RHS) (RM) (%) Source: Bloomberg www.clsa.com e s u lts re ie Defying gravity Hartalega’s 1Q14 results were in-line with ours and consensus forecasts with net profit of RM62.9m (+18%YoY). Operating margins continue to defy gravity and saw an increase of 110bps YoY to 29.5% due to continued easing of raw material costs and strengthening MYR. We reduce our ASP assumption resulting in a cut to NP but we increase our MYR/USD assumption to RM3.20 until 2015 and cut our feedstock forecasts to US$1,200/tonne (from US$1,400) resulting in upgrades to earnings. We increase our TP to 8.00 based on a 20 x PE mul tiple ap plied to CY14 EPS and upgrade our rec to BUY. Harta lega is our preferred pic k in the gloves space due to its nitrile segment leadership and USD exporter status and we recommend investors to switch from Top Glove (U-PF). Positive signs Hartalega reported 1Q14 net profit of RM62.9m (+18%YoY) which was in-line at 24% CLSA a nd cons ensu s foreca sts. T op-l ine growt h was only +1 2%Y oY but continued easing in raw material costs and efficiency gains saw operating expenses only increase by 8%YoY. Therefore, there was an increase of110bps in operating margins which is a big positive for the company. Catering for demand Demand growth continues to be robust at +20%YoY in stark contrast to the latex segment which is s eeing still weak demand at 5-8%Y oY . Hart aleg a commissioned 10 new lines in July, to meet demand in the interim ahead ofthe planned NGC expansion in 2014, as utilisation continues to be sky-high at 91%. Therefore, pr ofits are expected t o pick up in 2H of FY3 /14. Adjusting assumptions Given the continued weakening in feedstock costs, we have trimmed our feedstock (butadiene) a ssumption to US$1,20 0/tonne (fro m US$1,400) flat until 2015 and als o adjusted our forex assumptio n to MY R3.20/USD un til 2015 which leads to earnings upgrades. Accordingly, we have trimmed our ASP assumption in-line with the lower feedstock costs cutting our revenue. The best BUY Hartalega checks all the boxes being a USD exporter as well as benefitting fro m lower commodi ty costs. Its n itr ile foc us sets i t apar t fro m the competition such as Top Glove (U-PF) whom is facing competition in the latex segment. As such, we upgrade our recommendation to BUY (from O-PF) with a raised TP of RM8.00 based on a 20x PE multiple to CY14 earnings.
