BIMB SECURITIES RESEARCH

MARKET INSIGHT
PP16795/03/2013(031743)

Wednesday, 9 May, 2012

Results Review

Hartalega Holdings
Inline Not a Bad Year
HART MK 2,864.5 Equity 365.4 8.54 5.00 254,468 43.7% Y Warrants Altman Z-score YTD price chg YTD KLCI chg Beta Major Shareholders Hartalega Industries Budi Tenggara SB 12.8 34.2% 3.9% 0.7 55.3% 0.6% Stock Data Bloomberg Ticker Market Cap Issued shares 52-week range (H) 52-week range (L) 3-mth avg daily volume Free Float Shariah Compliant Financial Derivatives Share Performance (%) Absolute vs. KLCI Financial Highlights FYE 31 Mar Turnover (RMm) EBIT Pretax profit Net Profit EPS (sen) EPS growth (%) PER (x) DPS (sen) Div. Yield (%) NTA/share (RM) EBIT margin Pretax margin Effective tax rate ROE ROA Net Gearing (x) Growth ratios Turnover EBIT Pretax profit Core Net profit Share Price Chart
9.00 8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 May-11

Neutral
Price: Target Price: RM7.84 RM7.84 (cum-price) RM3.92 (ex-price)
Hartalegas FY12 net earnings of RM201.6m is in line with our forecast. Despite the hike in raw material prices, Hartalega managed to achieve earnings growth of 6%. We are positive on the outlook of the company given its high level of production efficiency. We have reduced our FY13 earnings forecast by factoring in higher depreciation charges; and introducing FY14 earnings forecast of RM250.4m. Following the earnings revision we have revised our target price down to RM7.84 (RM3.82 ex-price). We maintain our NEUTRAL recommendation on Hartalega. Nonetheless, we still like stock and would recommend investors to accumulate the stock at lower levels. Lower YoY and QoQ earnings. Both YoY and QoQ earnings were lower (-4.6% and -1.5%) mainly due to sharp increase in nitrile price. Full year EBIT margin has reduced from 33.4% to 28% due to the same reason. Nonetheless, this level of EBIT margin is far higher than industry average of less than 20%. We believe prevailing competition is just short term because of the changing behaviour of key global customers as they are switching from natural latex to nitrile due to higher pricing of natural latex gloves. Meanwhile, management anticipates demand growth for nitrile gloves to be sustainable at 20% annually over the medium term. Plant expansion. Hartalega has unveiled its new expansion plan setting up the next generation integrated glove manufacturing complex (NGC) comprising of 70 new high tech production lines. Construction is scheduled to begin in 2013 and targeted to complete by 2021. The first phase will begin in 2013 and scheduled for completion by 2017; will have 40 production lines with total annual capacity of 14bn pieces while the second phase (from 2017 to 2021) will add another 30 production lines with total annual capacity of 10.5bn pieces. Upon full completion, the total installed production capacity for the Hartalega group including the current factories in Batang Berjuntai will be 38bn pieces per annum, nearly 4 times its current size. Reducing our forecasts. We reduced our FY13 net earnings estimates by 2.6% to RM238.5m by factoring in higher depreciation charges. We also introduced FY14 net earnings forecast at RM250.4m. Balance sheet remains strong with a net cash per share of 38sen. Its FY12 ROE of 32.5% remains the highest in the industry. Dividend proposed. Management proposed a third interim single tier dividend of 6sen/share. To date, Hartalega has declared dividend amounting to 18sen and we expect a final dividend of 6sen to be declared totalling 24sen for FY12. Based on a payout ratio of 40% we expect Hartalega to pay dividend of 26sen for FY13 translating into net yield 3.3%.

1mth (1.5) 31.4

3mth (2.4) (4.6)

12mth 43.1 31.4

2010 571.9 181.2 177.8 142.9 39.1 69.1% 20.0 19.9 2.5% 0.97

2011 734.9 245.7 243.3 190.2 52.0 33.1% 15.1 20.9 2.7% 1.35

2012 931.1 260.3 258.6 201.6 55.2 6.0% 14.2 24.0 3.1% 1.70

2013E 986.1 307.6 305.8 238.5 65.3 18.3% 12.0 26.0 3.3% 1.89

2014E 1069.7 327.1 325.2 250.4 68.5 5.0% 11.4 28.0 3.6% 2.09 30.6% 30.4% 23.0% 29.9% 25.8% net cash

31.7% 33.4% 28.0% 31.2% 31.1% 33.1% 27.8% 31.0% 19.5% 21.8% 22.0% 22.0% 40.4% 38.5% 32.5% 34.5% 33.5% 34.3% 29.2% 29.0% net cash net cash net cash net cash

29.0% 85.0% 86.2% 69.1%

28.5% 35.7% 36.8% 33.1%

26.7% 5.9% 6.3% 6.0%

5.9% 18.2% 18.3% 18.3%

8.5% 6.3% 6.4% 5.0%

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

The Research Team research@bimbsec.com.my 03-26918887 ext 111

View & Valuation. Following the earnings revision, our target price is reduced to RM7.84 (RM3.92 ex-price) based on 3-year average PER of 12.5x over its CY12 EPS. We maintain our NEUTRAL recommendation on Hartalega. Nonetheless, we still like stock and we recommend investors to accumulate the stock at lower level.

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9 May 2012

Results Review: Hartalega Holdings 3QFY12

Quarterly figures
FY 31 Mar (RMm) Revenue EBIT Pretax profit Taxation Minority Interest Net Profit EPS (sen) Net gearing (x) EBIT margin (%) PBT margin (%) Net profit margin (%) Effective tax rate (%) 4QFY11 192.5 67.7 66.3 (13.9) (0.0) 52.4 14.3 net cash 35.1% 34.4% 27.2% 20.9% 1QFY12 219.4 71.2 70.7 (15.9) 0.0 54.8 15.0 net cash 32.4% 32.2% 25.0% 22.5% 2QFY012 229.5 60.0 59.6 (13.4) (0.0) 46.1 12.6 net cash 26.1% 25.9% 20.1% 22.5% 3QFY12 242.0 64.5 64.1 (13.2) (0.1) 50.7 13.9 net cash 26.7% 26.5% 21.0% 20.7% 4QFY12 240.2 64.7 64.3 (14.4) 0.1 50.0 13.7 net cash 26.9% 26.8% 20.8% 22.4% QoQ Chg -0.7% 0.3% 0.3% 8.7% -187.4% -1.5% -1.5% n.a. 1.0% 1.0% -0.8% 8.4% YoY Chg 24.8% -4.4% -3.0% 3.9% -369.4% -4.6% -4.6% n.a. -23.4% -22.3% -23.6% 7.1% FY11 734.9 245.7 243.3 (53.1) (0.0) 190.2 52.0 net cash 33.4% 33.1% 25.9% 21.8% FY12 931.1 260.3 258.6 (56.9) (0.0) 201.6 55.2 net cash 28.0% 27.8% 21.7% 22.0% YTD Chg 26.7% 5.9% 6.3% 7.3% n.a. 6.0% 6.0% n.a. -16.4% -16.1% -16.3% 0.9%

Source: BIMB Securities

Income Statement
FY 31 Mar (RMm) Revenue EBITDA Pretax profit Tax MI Net profit CY Net profit EPS (sen) EPS growth (%) CY EPS DPS (sen) NTA/ share (RM) Net gearing (x) PER (x) Div. yield (%) P/ NTA (x) ROE (%) 2010 571.9 201.0 177.8 (34.7) (0.1) 142.9 178.3 39.1 69.1% 48.8 19.9 1.0 net cash 20.0 2.5% 8.1 40.4% 2011 734.9 270.7 243.3 (53.1) (0.0) 190.2 198.8 52.0 33.1% 54.4 20.9 1.4 net cash 15.1 2.7% 5.8 38.5% 2012 931.1 289.3 258.6 (56.9) (0.0) 201.6 229.3 55.2 6.0% 62.7 24.0 1.7 net cash 14.2 3.1% 4.6 32.5% 2013E 2014E 986.1 1,069.7 343.8 366.7 305.8 325.2 (67.3) (74.8) (0.0) (0.0) 238.5 250.4 247.4 254.2 65.3 68.5 18.3% 5.0% 67.7 69.6 26.0 28.0 1.9 2.1 net cash net cash 12.0 11.4 3.3% 3.6% 4.1 3.7 34.5% 29.9% Source: BIMB Securities

Balance Sheet
FYE 31 Mar (RMm) Non Current Assets Current Assets Total Assets Current Liabilities Non Current Liabilities Shareholders' Fund Minority Interests Equity & Liabilities 2010 293.0 185.8 478.9 69.0 55.5 354.1 0.3 478.9 2011 348.9 282.4 631.3 75.4 61.3 494.3 0.4 631.3 2012 380.1 371.8 751.9 79.9 51.7 619.7 0.5 751.9 2013E 394.1 500.5 894.6 79.2 51.7 763.2 0.4 894.6 2014E 404.5 643.4 1,047.8 84.3 51.7 911.3 0.4 1,047.8 Source: BIMB Securities

www.bimbsec.com.my

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9 May 2012
DEFINITION OF RATINGS BIMB Securities uses the following rating system:

Results Review: Hartalega Holdings 3QFY12

STOCK RECOMMENDATION BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months. TRADING BUY Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain. NEUTRAL Share price may fall within the range of +/- 10% over the next 12 months TAKE PROFIT Target price has been attained. Fundamentals remain intact. Look to accumulate at lower levels. TRADING SELL Share price may fall by more than 15% in the next 3 months. SELL Share price may fall by more than 10% over the next 12 months. NOT RATED Stock is not within regular research coverage. SECTOR RECOMMENDATION OVERWEIGHT The Industry as defined by the analysts coverage universe, is expected to outperform the relevant primary market index over the next 12 months NEUTRAL The Industry as defined by the analysts coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months UNDERWEIGHT The Industry as defined by the analysts coverage universe, is expected to underperform the relevant primary market index over the next 12 months Applicability of ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Disclaimer The investments discussed or recommended in this report not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of BIMB Securities Sdn Bhd may from time to time have a position in or either the securities mentioned herein. Members of the BIMB Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgements as of this and are subject to change without notice. BIMB Securities Sdn Bhd accepts no liability for any direct, indirect or consequential loss arising from use of this report.

Published by

BIMB SECURITIES SDN BHD (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Level 32, Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur Tel: 03-2691 8887, Fax: 03-2691 1262 http://www.bimbsec.com.my

Kenny Yee Head of Research

www.bimbsec.com.my

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