PUBLIC INVESTMENT BANK

PublicInvest Research Results Review

KDN PP17686/03/2013(032117)

Wednesday, August 07, 2013

HARTALEGA HOLDINGS BERHAD

DESCRIPTION The worlds largest nitrile glove manufacturer. Renowned for its innovative technological methods. 12-Month Target Price Previous Target Price Current Price Expected Return Market Sector Bursa Code Bloomberg Ticker Shariah-Compliant SHARE PRICE CHART
7.00 6.50 6.00 5.50 5.00 4.50 4.00 Feb-13 Mar-13 Apr-13 May-13 Jun-13

Neutral

Maintaining Efficiency
Hartalega begins its 1QFY14 with exceptional y-o-y growth results from continuous expansion in production capacity coupled with the respite to costs from lower nitrile and latex rubber prices. Albeit currency and price competition challenges which flattened growth q-o-q, revenue registered RM278m (+12.2% y-o-y, +3.1% q-o-q) and net profit increased to RM62.6m (+17.7% y-o-y, 0% q-o-q). Going forward we will continue to assume further contributions from Plant 6s full commission as of July (10 production lines) an additional <3.9bn pcs/yr. Although maintaining our Neutral recommendation from lacking near-term catalysts, we are revising our TP upwards to RM6.22 (11.3% from previous TP of RM5.59). The adjustment is in anticipation of potential increase in dividend payout of <50% in line with higher earnings by FY15F from the delivery of proposed production plans. Increasing global demand. Boosted sales volume by +27% y-o-y of nitrile rubber gloves, amidst lower average selling price from the softening of raw material prices (Figure 2) and a more competitive price structure to enhance efficiency. Maintaining margins. A 22.5% net profit margin was achieved this quarter, supported by the easing of raw material prices together with higher nitrile product margins (more superior from its higher manufacturing cost). We continue to expect the groups margins to be maintained buoyed by the upcoming Next Generation Integrated Glove Manufacturing Complex (NGC) which would enhance economies of scale through i.) scale of growth size, and ii.) reflect higher earnings from tax savings via capital allowance. NGC in motion. Having signed the Sales and Purchase Agreement for the land acquisition in Sepang. Hartalega is scheduled to begin construction of the NGC in September. Reiterating the projects < 28.5bn pcs/yr capacity upon commissioning by August 2014 would see some quadrupling of the groups current rubber glove capacity, and technological enhancements translating to more efficient productivity. Positive investors sentiment. We believe the groups positive price performance speaks for itself. Although rendering Neutral in our recommendation, the group would benefit from i.) increased product variants such as COATS and medical grade gloves, ii.) increased demand especially from emerging markets such as Brazil (market share increased from 1.5% - 3.5%), and iii.) strengthening of the US dollar.
2011A 734.9 273.1 242.8 190.3 26.2 25.9 10.4 1.5 2012A 931.1 296.6 258.4 201.4 27.6 24.6 11.9 1.8 2013F 1,032.0 344.2 305.9 234.7 32.0 21.2 14.5 2.1 2014F 1,175.5 392.1 345.1 268.9 35.8 19.0 16.5 2.4 2015F 1,263.9 403.2 348.7 271.7 34.5 19.7 18.5 2.5 CAGR 11.5% 8.1% 7.5% 7.4% 5.7%

RM6.22 RM5.59 RM6.79 -8.5% Main Rubber Gloves 5168 HART MK Yes

Jul-13

Aug-13

52 Week Range (RM) 3-Month Average Vol (000) SHARE PRICE PERFORMANCE 1M 4.8 3.9 3M 29.3 25.8

4.21-6.85 796.6

Absolute Returns Relative Returns

6M 48.2 32.4

KEY STOCK DATA

5,017.1 738.9

Market Capitalisation (RM m) No. of Shares (m)

MAJOR SHAREHOLDERS % 50.1 7.7 5.5 4.9

KEY FORECAST TABLE (RM m)

FYE Mar (RM m) Revenue Gross Profit Pre-tax Profit Net Profit EPS (Sen) P/E (x) DPS (Sen) Dividend Yield (%)

Hartalega Industries SB BNP Paribas Wealth Management Employees Provident Fund Budi Tenggara

Research Team T 603 2031 3011 F 603 2272 3704 E research@publicinvestbank.com.my

Source: Company, PublicInvest Research estimates

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Table 1: Results Summary FYE Mar (RM m) 1Q14 1Q13 4Q13 Q-o-Q chg (%) 3.1 0.7 -21.1 0.7 0.0 -77.4 0.0 -0.2 Y-o-Y chg (%) 12.2 16.8 -57.8 17.2 14.7 -59.7 17.3 15.3 YTD FY14 YTD FY13 Y-o-Y chg (%) 12.2 16.8 -57.8 17.2 14.7 -59.7 17.3 15.3 Comments Increase in-line with continuous expansion in production capacity and increase in demand.

Revenue EBIT Finance costs Pretax profit Taxation Minority interest Net Profit EPS (sen) EBIT Margin (%) Pre-tax Margin (%) Net Profit Margin (%)
Source: Company

278.0 82.0 -0.1 81.9 -18.9 0.0 62.6 8.38 29.5

247.7 70.2 -0.3 69.9 -16.5 -0.1 53.4 7.27 28.3

269.8 81.5 -0.2 81.3 -18.9 -0.1 62.6 8.40 30.2

278.0 82.0 -0.1 81.9 -18.9 0.0 62.6 8.38 29.5

247.7 70.2 -0.3 69.9 -16.5 -0.1 53.4 7.27 28.3

29.5

28.2

30.1

29.5

28.2

Ease in raw material prices of nitrile and natural latex y-o-y, coupled with improved operating efficiency of new production lines.

22.5

21.5

23.2

22.5

21.5

Figure 1: Dividend Discount Model Beta Expected market return Risk-free rate Cost of equity Cost of debt Weightage of equity Weightage of debt WACC Terminal Growth Rate Year Dividend Forecast DDM Y1 Y2 Y3 Y4 Y5 Terminal value NPV
Source: PublicInvest Research estimates

0.706 8.5% 3.4% 7.0% 6.0% 85.0% 15.0% 6.8% 2.0% 2015F 18.5 2016F 24.3 2017F 29.5 2018F 34.6

2014F 16.5

0.15 0.16 0.20 0.23 0.25 5.22 6.22

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Figure 2: Nitrile and Latex Prices
Nitrile 7830 8000 7000 6000 5000 4000 3000 2000 1000 0 7103 7022 6702 Latex

RM/t 9000 7520 7430 6630 6520 5780 5850

6160

5610 5760

6140 6150 6130

5810 5840 5630

5230

5722 5798 5926 5526 5715 5480 5409 5368 5409 5538 4819 4555 4494 4028

Source: Company

Figure 3: USD/MYR Fluctuations

USD/MYR 3.25 3.2 3.15 3.1 3.05 3 2.95 2.9 2.85 2.8

Source: Bloomberg

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KEY FINANCIAL DATA

INCOME STATEMENT DATA
FYE Mar (RM m) Revenue 2011A 734.9 2012A 931.1 2013F 1,032.0 2014F 1,175.5 2015F 1,263.9

Cost of sales Operating Profit Other Gains / (Losses) Finance Costs Pre-tax Profit Income Tax Effective Tax Rate (%) Minorities Net Profit Growth Revenue Operating Profit Net Profit
Source: Company, PublicInvest Research estimates

-461.9 273.1 -2.5 242.8 -52.5 21.6 0.0 190.3

-634.4 296.6 -27.8 -1.7 258.4 -57.0 22.0 -0.1 201.4

-687.8 344.2 -36.5 -0.1 305.9 -70.8 23.2 -0.3 234.7

-783.4 392.1 -38.3 4.7 345.1 -75.9 22.0 -0.3 268.9

-860.7 403.2 -51.7 1.1 348.7 -76.7 22.0 -0.3 271.7

29% 33% 33%

27% 8% 6%

11% 18% 17%

14% 14% 15%

8% 2% 1%

BALANCE SHEET DATA

FYE Mar (RM m) Property, Plant & Equipment Cash and Cash Equivalents Receivables, deposits and prepayment Other Assets Total Assets Payables Borrowings Deferred tax Other Liabilities Total Liabilities Shareholders Equity Total Equity and Liabilities
Source: Company, PublicInvest Research estimates

2011A 348.7 117.0 101.0 68.4 635.0 57.2 39.0 36.9 7.5 140.5 494.4 635.0

2012A 370.3 163.2 117.1 107.5 758.2 60.4 24.6 40.5 13.1 138.7 619.5 758.2

2013F 485.8 182.4 124.7 143.4 936.3 92.8 12.2 50.3 15.5 170.8 765.5 936.3

2014F 678.0 77.7 142.6 281.4 1,179.7 105.7 23.0 50.3 25.2 204.1 975.5 1,179.7

2015F 915.2 187.3 153.3 228.7 1,484.5 113.7 24.4 50.3 21.6 210.0 1,274.6 1,484.5

PER SHARE DATA AND RATIOS

FYE Mar Book Value Per Share NTA Per Share EPS (Sen) DPS (Sen) Payout Ratio ROA ROE
Source: Company, PublicInvest Research estimates

2011A 0.7 2.7 25.9 10.4 40% 34% 45%

2012A 0.8 3.4 24.6 11.9 44% 29% 36%

2013F 1.0 2.1 21.2 14.5 45% 28% 34%

2014F 1.3 2.6 19.0 16.5 45% 25% 31%

2015F 1.6 3.2 19.7 18.5 50% 20% 24%

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RATING CLASSIFICATION
STOCKS OUTPERFORM NEUTRAL UNDERPERFORM TRADING BUY The stock return is expected to exceed a relevant benchmarks total of 10% or higher over the next 12months. The stock return is expected to be within +/- 10% of a relevant benchmarks return over the next 12 months. The stock return is expected to be below a relevant benchmarks return by -10% over the next 12 months. The stock return is expected to exceed a relevant benchmarks return by 5% or higher over the next 3 months but the underlying fundamentals are not strong enough to warrant an Outperform call. The stock return is expected to be below a relevant benchmarks return by -5% or more over the next 3 months. The stock is not within regular research coverage.

TRADING SELL NOT RATED

SECTOR OVERWEIGHT NEUTRAL UNDERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months. The sector is expected to perform in line with a relevant benchmark over the next 12 months. The sector is expected to underperform a relevant benchmark over the next 12 months.

DISCLAIMER
This document has been prepared solely for information and private circulation only. It is for distribution under such circumstances as may be permitted by applicable law. The information contained herein is prepared from data and sources believed to be reliable at the time of issue of this document. The views/opinions expressed herein are subject to change without notice and solely reflects the personal views of the analyst(s) acting in his/her capacity as employee of Public Investment Bank Berhad (PIVB). PIVB does not make any guarantee, representations or warranty neither expressed or implied nor accepts any responsi bility or liability as to its fairness liability adequacy, completeness or correctness of any such information and opinion contained herein. No reliance upon such statement or usage by the addressee/anyone shall give rise to any claim/liability for loss of damage against PIVB, Public Bank Berhad, its affiliates and related companies, directors, officers, connected persons/employees, associates or agents. This document is not and should not be construed or considered as an offer, recommendation, invitation or a solicitation of an offer to purchase or subscribe or sell any securities, related investments or financial instruments. Any recommendation in this document does not have regards to the specific investment objectives, financial situation, risk profile and particular needs of any specific persons who receive it. We encourage the addressee of this document to independently evaluate the merits of the information contained herein, consider their own investment objectives, financial situation, particular needs, risks and legal profiles, seek the advice of their, amongst others, tax, accounting, legal, business professionals and financial advisers before participating in any transaction in respect of any of the securities of the company(ies) covered in this document. PIVB, Public Bank Berhad, our affiliates and related companies, directors, officers, connected persons/employees, associates or agents may own or have positions in the securities of the company(ies) covered in this document or any securities related thereto and may from time to time add or dispose of, or may be materially interested in, any such securities. Further PIVB, Public Bank Berhad, our affiliates and related companies, associates or agents do and/or seek to do business with the company(ies) covered in this document and may from time to time act as market maker or have assumed an underwriting commitment in the securities of such company(ies), may sell them or buy them from customers on a principal basis, may have or intend to accommodate credit facilities or other banking services and may also perform or seek to perform investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment advisory or other services from any entity mentioned in this document. The analyst(s) and associate analyst(s) principally responsible for the preparation of this document may participate in the solicitation of businesses described aforesaid and would receive compensation based upon various factors, including the quality of research, investor client feedback, stock pickings and performance of his/her recommendation and competitive factors. Hence, the addressee or any persons reviewing this document should be aware of the foregoing, amongst others, may give rise to real or potential conflicts of interest.

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