Hartalega Holdings Bhd 
(May 6, RM8.09)
Maintain hold with higher target price (TP) of RM8.23: Hartalega Holdings Bhd reported a net profit of RM54.9 million for its fourth quarter ended March 31 of financial year 2015 (4QFY15). The quarterly net profit climbed 11% quarter-on-quarter (q-o-q) and 11.7% year-on-year (y-o-y). Similarly, quarterly revenue was higher, rising by 6.5% q-o-q and 8.8% y-o-y. For cumulative FY15, its net profit of RM209.7 million was 9.9% lower than a year ago, while top line grew by a marginal 3.5% y-o-y. 

Hartalega’s full-year earnings for FY15 (excluding write-off on decommissioning of the plant amounting to RM3.1 million) was within our and consensus expectations after accounting for 98% to 99% of our and consensus full-year estimates.

The group’s 4QFY15 revenue of RM305.1 million was 8.8% higher than a year ago, mainly lifted by higher sales volume (up 11% y-o-y) and appreciation of the US dollar. However, profit before tax (PBT) shrank by 4.2% y-o-y, due primarily to the high start-up expenses from the next-generation integrated glove manufacturing complex (NGC) project, increase in maintenance and natural gas costs. 

Nevertheless, tax rate for the quarter was lower at 18% against that of 29.7% a year ago due to the recognition of tax losses in Hartalega’s NGC as deferred tax assets in 4QFY15. The lower tax expenses lifted the group’s bottom line by 11.7% y-o-y.

Operations of Hartalega’s NGC in Sepang, Selangor, were commissioned in early January. Production capacity is expected to be lifted to 18.4 billion pieces per annum in FY16 from 15 billion pieces per annum in FY15. Meanwhile, the NGC incurred start-up losses of RM14 million for FY15 while management expects the NGC to contribute positively by 2QFY16.

The group has declared an interim net dividend of three sen per share, lifting the full-year dividend to 13 sen per share (FY14: 14.5 sen per share) or equivalent to a dividend yield of 1.6%.

We maintain our earnings forecast for FY16F. We estimate earnings of the group for FY16F and FY17F to grow 35% and 21% respectively on the back of expansion in production capacity at the NGC.

We maintain “hold” with a higher TP of RM8.23 (previous TP: RM7), pegged at a higher price-earnings ratio (PER) of 23.5 times (previous PER 19.7 times) of FY16 earnings per share, which is close to its 1 standard deviation (+1SD) above the 3-year mean PER. We peg our valuation of Hartalega above its mean PER of 20 times as we are sanguine about its earnings outlook in view of production capacity at the NGC coming on stream coupled with the favourable foreign exchange and lower raw material costs. — JF Apex Securities Bhd, May 6

This article first appeared in The Edge Financial Daily, on May 7, 2015