Download - CLSA Hartalega 1Q2014 b

7/27/2019 CLSA Hartalega 1Q2014 b

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HartalegaRM6.79 - 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 research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com

Indar [email protected]+60(3)20567826

7 August 2013

MalaysiaHealthcare

Reuters HTHB.KLBloomberg HART MK

Priced on 6 August 2013

KLSE Comp @ 1,784.6

12M hi/lo RM6.85/4.21

12M price target RM8.00±% potential +18%

Shares in issue 484.5mFree float (est.) 44.5%

Market cap US$1,556m

3M average daily volume

RM4.7m (US$1.5m)

Major shareholders

Hartalega Industries 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 Feb-12 Aug-12 Feb-13Hartalega (LHS)

Rel to Comp (RHS)

(RM) (%)

Source: Bloomberg

www.clsa.com

R e

s ul t sr evi ew

Defying gravityHartalega’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 20x PE multiple applied

to CY14 EPS and upgrade our rec to BUY. Hartalega is our preferred pick

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 signsHartalega reported 1Q14 net profit of RM62.9m (+18%YoY) which was in-line

at 24% CLSA and consensus forecasts. Top-line growth was only +12%YoY

but continued easing in raw material costs and efficiency gains saw operating

expenses only increase by 8%YoY. Therefore, there was an increase of

110bps 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 seeing still weak demand at 5-8%YoY. Hartalega

commissioned 10 new lines in July, to meet demand in the interim ahead of

the planned NGC expansion in 2014, as utilisation continues to be sky-high at

91%. Therefore, profits are expected to pick up in 2H of FY3/14.

Adjusting assumptions

Given the continued weakening in feedstock costs, we have trimmed our

feedstock (butadiene) assumption to US$1,200/tonne (from US$1,400) flat

until 2015 and also adjusted our forex assumption to MYR3.20/USD until

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

from lower commodity costs. Its nitrile focus sets it apart from 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) witha raised TP of RM8.00 based on a 20x PE multiple to CY14 earnings.

http://www.clsa.com/

https://www.clsa.com/member/analysts/index.cfm?alogin=dhaliwi&pagename=bios

http://www.clsa.com/



Defying gravity Hartalega - BUY

7 August 2013 [email protected] 2

Defying gravityFigure 1

Hartalega: 1Q14 summary1QFY13 4QFY13 1QFY14 % YoY % QoQ

Revenue 247.7 269.8 278.0 12.2 3.1

Operating expenses (177.6) (190.1) (191.9) 8.1 1.0

Other income 0.1 1.8 (4.0) nm nm

EBITDA 81.5 88.8 100.8 23.8 13.6

Depreciation (11.3) (7.3) (18.8) 67.0 158.4

Operating profit 70.2 81.5 82.0 16.8 0.7

Finance costs (0.3) (0.2) (0.1) (57.8) (21.1)

Core PBT 69.9 81.3 81.9 17.2 0.7

Taxation (16.5) (18.9) (18.9) 14.7 0.0

PAT 53.4 62.4 63.0 17.9 0.9

MI 0.1 (0.1) (0.1) (233.8) (20.2)

Core Net profit 53.5 62.3 62.9 17.6 1.0

EPS 7.3 8.5 8.6

Margins

Operating profit 28.4% 30.2% 29.5%

PBT 28.2% 30.1% 29.5%

Net profit 21.6% 23.1% 22.6%

Effective tax 23.6% 23.2% 23.1%

Source: Hartalega

Figure 2

Hartalega 1Q14: Customer split by geography

Source: Hartalega

North America

54%

Latam

3%

Europe

30%

Asia

11%

Oceania

2%ROW

0%

Margins continue toexpand

Mainly N America andEurope customers





Figure 3

Hartalega: 1Q14 cost breakdown

Source: Hartalega

Figure 4

Hartalega: Feedstock (butadiene) prices

Source: Platts

Figure 5

Glove: Peer comp

Name BBG code Mkt Cap ADT PE (x) EPS Growth (%) ROE (%) Yield (%) PB (x)

(US$bil) (US$m) CY13 CY14 CY13 CY14 CY13 CY13 CY13

Hartalega HART MK Equity 1.5 1.5 20.0 18.4 9.5 9.0 30.3 2.8 6.2

Top Glove TOPG MK Equity 1.1 2.5 16.3 14.8 9.3 9.9 16.8 3.2 2.6

Ansell ANN AU Equity 2.2 14.5 15.3 12.5 9.4 10.8 16.6 2.4 2.6

Supermax SUCB MK Equity 0.5 1.6 11.0 9.9 16.1 11.1 14.7 3.1 1.6

Kossan KRI MK Equity 0.6 1.3 15.0 12.8 24.8 17.3 19.7 2.4 2.7

Wgt Avg 16.3 14.3 11.5 10.8 20.4 2.7 3.5

Source: CLSA *Bloomberg consensus for KRI, SUCB

Feedstock44%

Fuel

9%

Labour

12%

Packaging

6%

Chemical10%

Overhead

& others

19%

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

2,100

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

US$/t

Feedstock is 44% of costs…

…and they keep comingoff now at US$950/tonne





Summary financialsYear to 31 March 2012A 2013A 2014CL 2015CL 2016CL

Summary P&L forecast (RMm)

Revenue 931 1,032 1,158 1,303 1,520

Op Ebitda 289 337 385 435 479

Op Ebit 257 305 343 383 416

Interest income 0 0 (1) 0 0

Interest expense 2 1 (2) (2) 0

Other items 0 - - - 0

Profit before tax 258 306 341 381 416

Taxation (57) (71) (74) (82) (90)

Minorities/Pref divs 0 0 0 0 0

Net profit 201 235 267 299 325

Summary cashflow forecast (RMm)

Operating profit 257 305 343 383 416

Operating adjustments - - - - -

Depreciation/amortisation 33 32 41 52 63Working capital changes (44) 0 (18) (21) (33)

Net interest/taxes/other (48) (70) (75) (84) (90)

Net operating cashflow 197 267 291 330 356

Capital expenditure (60) (188) (190) (214) (215)

Free cashflow 137 79 101 116 141

Acq/inv/disposals 0 - - - -

Int, invt & associate div 4 0 (1) 0 -

Net investing cashflow (57) (188) (191) (214) (215)

Increase in loans (15) 0 0 0 0

Dividends (87) (106) (120) (134) (146)

Net equity raised/other 7 0 0 0 0

Net financing cashflow (95) (106) (120) (134) (146)

Incr/(decr) in net cash 45 (26) (20) (19) (5)

Exch rate movements 1 1 1 1 1

Opening cash 117 162 136 116 97Closing cash 163 137 117 98 93

Summary balance sheet forecast (RMm)

Cash & equivalents 163 137 117 98 93

Debtors 111 142 159 179 209

Inventories 98 99 109 123 148

Other current assets 0 0 0 0 0

Fixed assets 380 536 685 847 998

Intangible assets 0 0 0 0 0

Other term assets 0 0 0 0 0

Total assets 752 914 1,071 1,247 1,449

Short-term debt 13 13 13 13 13

Creditors 55 88 97 109 131

Other current liabs 13 13 13 13 13

Long-term debt/CBs 12 12 12 12 12

Provisions/other LT liabs 40 40 40 40 40

Minorities/other equity 1 1 1 1 2

Shareholder funds 620 749 896 1,060 1,239

Total liabs & equity 752 914 1,070 1,247 1,449

Ratio analysis

Revenue growth (% YoY) 26.7 10.8 12.2 12.5 16.7

Ebitda growth (% YoY) 4.8 16.4 14.2 13.2 10.0

Ebitda margin (%) 31.1 32.6 33.2 33.4 31.5

Net profit margin (%) 21.6 22.7 23.1 22.9 21.4

Dividend payout (%) 45.0 45.0 47.3 47.3 45.0

Effective tax rate (%) 22.0 23.2 21.6 21.6 21.6

Ebitda/net int exp (x) - - 176.7 260.3 -

Net debt/equity (%) (22.3) (15.0) (10.3) (6.9) (5.5)

ROE (%) 36.1 34.3 32.5 30.5 28.3

ROIC (%) 41.0 39.1 35.4 32.1 29.1EVA®/IC (%) 31.3 29.4 25.7 22.4 19.4

Source: CLSA





Companies mentionedHartalega (HART MK - RM6.79 - BUY)

Recommendation history of Hartalega Holdings Bhd HART MK

Date Rec Target Date Rec Target

27 Jun 2013 O-PF 7.00 09 Apr 2012 BUY 4.63

08 May 2013 O-PF 5.80 02 Feb 2012 BUY 4.30

18 Jan 2013 U-PF 5.10 14 Sep 2011 BUY 3.65

22 Nov 2012 Dropped Coverage 18 Mar 2011 BUY 3.70

Source: CLSA

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S t o c k

p r i c e

( R M )

Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13

Indar DhaliwalOther analystsNo coverage

BUYU-PFN-R

O-PFSELL

