COMPANY UPDATE

TA Securities

Tuesday, September 13, 2016

FBM KLCI: 1,686.44
Sector: Healthcare

A Member of the TA Group

MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

Hartalega Holdings Berhad

TP: RM4.10 (-10.5%)

Last traded: RM4.58

Making Progress

SELL

THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*

Wilson Loo

Tel: 603-2167 9606

wilsonloo@ta.com.my

Coming away from our recent meeting with Hartalegas management, we

emerged hopeful for the groups performance in quarters ahead. Since June
2016, utilization rates have normalised back above 85%, a level not seen
since 1QFY16. As for the minimum wage and natural gas hike effective July
2016, we understand that selling prices were revised by +5% to +10% to
offset the cost increases. On the expansion front, prospective lines from the
NGC would be commissioned at a more gradual pace of 1 line per month
from 2 lines per 1.5 months previously. Strategically, amidst the
increasingly competitive nitrile glove segment and with upcoming new
capacity, maintaining optimal plant utilization rates remains a key agenda
of the group. We maintain our TP of RM4.10/share pegged to an unchanged
PE multiple of 20.0x. Reiterate SELL as we opine the stock is fairly valued.

www.taonline.com.my

Share Information
Bloomberg Code

HART MK

Stock Code

5168

Listing

Main Market

Share Cap (mn)

1,641.1

Market Cap (RMmn)

7,516.3

Par Value

0.50

52-wk Hi/Lo (RM)

6.15/3.81

12-mth Avg Daily Vol ('000 shrs)

Estimated Free Float (%)

2,070.1
30.6

Beta

0.5

Major Shareholders (%)

Hartalega Industries Sdn Bhd - 49.3
EPF - 7.1

Optimistic on Quarters Ahead

After a roller coaster FY16, Hartalega begun FY17 encouragingly with its
1QFY17 core net margin having improved by 5%-points QoQ to 16%, drawing
closer towards the historical +/-20%. Note that the recovery in margin was
mainly on lower operating expenses. Sales volumes then was rather flattish due
to certain customers holding back orders amidst fluctuations in the
USD/Ringgit and raw material prices.

Forecast Revision
FY17
Forecast Revision (%)
Net profit (RMmn)
Consensus
TA's / Consensus (%)
Previous Rating

FY18

289.8
353.1
283.0
316.3
102.4
111.6
Sell (Maintained)

Financial Indicators

Figure 1: Quarterly Performance

RM mn'
450
400
350
300
250
200
150
100
50
0

Revenue (LHS)

Core Net Profit (LHS)

379

Core Net Profit Margins (RHS)

25%

402

400

398

20%

321

15%

Net gearing (x)

CFPS (sen)
P/CFPS (x)
ROAA (%)
ROAE (%)
NTA/Share (RM)
Price/ NTA (x)

FY17

FY18

0.2
19.9
23.1
13.9
18.3
1.0
4.6

0.2
23.7
19.3
14.9
20.1
1.1
4.1

HART

FBM KLCI

4.1
13.1
(2.8)
10.4

0.1
2.8
(0.6)
5.2

10%
79

63

72

43

63

5%
0%

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

Source: Company, TA Securities

Instilling optimism for the quarters ahead, we learned that overall plant
utilisation rates have normalised back above 85% (from 82% in 1QFY17) with
capacity booked out from June to October 2016. This is a level not seen since
1QFY16 due to the commissioning of the NGCs Plant 1 and Plant 2 throughout
2016 which was completed in 4QFY16. The increased demand experienced was
attributed to 1) the general sustained growth in demand and 2) pent up
demand from customers that were holding back orders before.
Meanwhile, concerned on the latest cost pressures from the 11% minimum
wage and 6% natural gas hike in July 2016, we understand that they would be
offset by the +5% to +10% selling price revisions made during June to July
2016. We believe this would be sufficient as our sensitivity analysis suggests a
+1.1% and +0.6% selling price revision respectively for the minimum wage and
natural gas hike.
Page 1 of 4

Share Performance (%)

Price Change
1 mth
3 mth
6 mth
12 mth

(12-Mth) Share Price relative to the FBM KLCI

Source: Bloomberg

TA Securities

13-Sep-16

A Member of the TA Group

Taking One Step at a Time

Note that FY16 was among the years where the group recorded huge additions
to capacity. During that year, its capacity increased by 37% YoY or 5.2bn gloves
YoY. This, alongside with the aggressive capacity expansion plans by its peers
had led to price competition across the sector. There was no exception for the
group, which historically commanded a pricing premium. Consequently, with
weaker bargaining power, it suffered from consecutive quarters of margin
compression during 3QFY16 and 4QFY16 (see Figure 1) as price competition
intensified.
Now aware of the repercussions of expanding too aggressively, the group
would be slowing down its future expansion. For its upcoming plants, Plant 3
and Plant 4 at the NGC which each house capacities of 4.8bn gloves per annum,
commissioning will now be conducted at a more gradual pace of 1 line per
month instead of 2 lines per 1.5 months that was previously guided for. Both
are respectively targeted to begin commissioning in October 2016 and October
2017.
Strategy: Embracing Diversification and Continuous Innovation
Amidst the increasingly competitive nitrile glove segment and with upcoming
new capacity, maintaining optimal plant utilization rates remains a key agenda
of the group. For this, focus would continue to be placed on 1) broadening its
concentrated customer base (currently its top 10 customers account for circa
60% of sales), 2) widening its geographical reach, 3) product innovation, and 4)
making continuous improvements to production lines to buoy overall
productivity.
Impact
Make no changes to our estimates.
Valuation & Recommendation
Maintain our TP for Hartalega at RM4.10/share pegged to an unchanged PE
multiple of 20.0x against CY17 EPS of 20.6sen. All in, we are positive on the
groups ability to sustain its recovery albeit at a mild pace as operations at the
NGC are gradually ramped up. Currently trading at a PE multiple of 22.3x, we
opine the stock is fairly valued. Reiterate SELL.
Figure 2: Forward PER
x
35.0
30.0

+1SD: 27.4x

25.0
20.0

Average: 21.2x

15.0

-1SD: 14.9x

10.0
5.0

Source: Company, TA Securities

Page 2 of 4

Jul-16

Apr-16

Jan-16

Jul-15

Oct-15

Apr-15

Jan-15

Oct-14

Jul-14

Jan-14

Apr-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

0.0

TA Securities

13-Sep-16

A Member of the TA Group

P&L
YE Mar 31 (RMmn)
Revenue
EBITDA
Depreciation & amortisation
Net finance cost
EI
PBT
Taxation
MI
Net profit
Core net profit
EPS (sen)
DPS (sen)
Ratios
YE Mar 31 (RMmn)
Valuations
PER
Dividend yield
PBV
Profitability ratios
ROAE
ROAA
EBITDA margin
PBT margin
PAT margin
Liquidity ratios
Current ratio
Quick ratio
Leverage ratios
Total liabilities/equity
Net debt/equity
Int. coverage ratio
Growth ratios
Sales
Pretax
Earnings
Total assets

FY15
1,146.0
322.8
-45.9
0.0
0.0
276.9
-66.7
-0.5
209.7
209.4
12.8
13.0

FY16
1,498.3
388.0
-70.6
0.0
0.0
317.4
-59.4
-0.4
257.6
256.3
15.7
7.5

FY17F
1,798.8
434.5
-89.5
0.1
0.0
345.1
-55.2
-0.1
289.8
289.8
17.7
7.9

FY18F
2,149.1
525.1
-104.2
-0.5
0.0
420.4
-67.3
-0.1
353.1
353.1
21.5
9.7

FY19F
2,517.6
620.1
-117.8
-0.5
1.0
502.8
-80.3
-0.1
422.4
422.4
25.7
11.6

FY15

FY16

FY17F

FY18F

FY19F

35.8
2.8
5.9

29.2
1.6
5.0

25.9
1.7
4.5

21.3
2.1
4.1

17.8
2.5
0.0

18.9
16.3
28.2
24.2
18.3

18.6
15.1
25.9
21.2
17.2

18.3
13.9
24.2
19.2
16.1

20.1
14.9
24.4
19.6
16.4

21.3
15.8
24.6
20.0
16.8

3.1
2.1

2.9
1.8

1.5
0.9

1.4
0.8

1.5
0.9

0.1
-0.1
2,550.9

0.3
0.1
844.0

0.3
0.2
372.7

0.3
0.2
382.9

0.4
0.2
400.2

3.5
-10.4
-9.9
31.1

30.7
14.6
22.8
34.5

20.1
8.8
12.5
13.2

19.5
21.8
21.8
12.9

17.1
19.4
19.4
12.8

Balance Sheet
YE Mar 31 (RMmn)
Fixed assets
Intangible assets
Others
LT assets

FY15
1,044.2
20.6
4.2
1,069.0

FY16
1,397.9
23.2
0.7
1,421.8

FY17F
1,608.4
23.2
0.7
1,632.3

FY18F
1,804.2
23.2
0.7
1,828.1

FY19F
1,986.3
23.2
0.7
2,010.2

120.2
197.9
70.5
0.0
388.5

202.1
238.7
84.2
14.0
539.0

242.6
286.6
43.8
14.0
587.0

289.9
342.4
32.0
14.0
678.2

339.6
401.1
61.7
14.0
816.4

1,457.5

1,960.8

2,219.3

2,506.3

2,826.7

108.6
6.1
12.4
127.1

147.1
41.0
0.6
188.7

180.9
219.3
0.6
400.8

215.1
260.3
0.6
476.0

250.8
297.3
0.6
548.7

0.3
59.5
59.8

207.1
60.8
267.9

94.0
60.8
154.8

111.6
60.8
172.4

127.4
60.8
188.2

Share capital
Reserves
Shareholders' funds
MI

400.8
868.2
1,269.0
1.7

820.5
681.6
1,502.1
2.1

820.5
841.0
1,661.5
2.2

820.5
1,035.1
1,855.7
2.3

820.5
1,266.9
2,087.4
2.4

Total liabilities and equity

1,457.5

1,960.8

2,219.3

2,506.3

2,826.7

FY15
276.9
45.9
0.0
-4.4
-47.3
-69.6
1.3
3.1
205.7

FY16
317.4
70.6
0.0
-2.3
-79.4
-64.4
1.2
0.3
243.4

FY17F
345.1
89.5
-0.1
0.0
-54.6
-55.2
1.0
0.0
325.8

FY18F
420.4
104.2
0.5
0.0
-68.9
-67.3
0.6
0.0
389.5

FY19F
501.8
117.8
0.5
0.0
-72.7
-80.3
0.8
0.0
467.9

Capex
Others
Investing cash flow

-422.7
4.9
-417.8

-422.1
-4.9
-427.0

-300.0
0.0
-300.0

-300.0
0.0
-300.0

-300.0
0.0
-300.0

Net share issue

Dividend paid
Net change in debts
Interest paid
Others
Financial cash flow

220.1
-105.0
1.6
-0.1
-4.6
112.0

78.8
-122.9
241.6
-0.4
0.1
197.2

0.0
-130.5
65.2
-0.9
0.0
-66.2

0.0
-158.9
58.7
-1.1
0.0
-101.3

0.0
-189.7
52.8
-1.3
0.0
-138.1

Net cash flow

Opening cash flow
Forex
Closing cash flow

-100.0
170.6
0.0
70.5

13.7
70.5
0.0
84.2

-40.4
84.2
0.0
43.8

-11.8
43.8
0.0
32.0

29.8
32.0
0.0
61.7

Inventories
Trade receivables
Cash
Others
Current assets
Total assets
Trade payables
ST borrowings
Others
Current liabilities
LT borrowings
Others
LT liabilities

Cash Flow
YE Mar 31 (RMmn)
PBT
Depreciation and amortisation
Net interest
Other non-cash
Changes in WC
Tax paid
Interest received
Others
Operational cash flow

Page 3 of 4

TA Securities

13-Sep-16

A Member of the TA Group

( T HI S P AGE I S I NT E N T I ON AL L Y L E FT B L ANK)

Stock Recommendation Guideline

BUY
:
HOLD :
SELL
:
Not Rated:

Total return within the next 12 months exceeds required rate of return by 5%-point.
Total return within the next 12 months exceeds required rate of return by between 0-5%-point.
Total return is lower than the required rate of return.
The company is not under coverage. The report is for information only.

Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months.
Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium.

Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and
opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts.
We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may
have an interest in the securities and/or companies mentioned herein.
for TA SECURITIES HOLDINGS BERHAD(14948-M)
(A Participating Organisation of Bursa Malaysia Securities Berhad)

Kaladher Govindan Head of Research

Page 4 of 4