Post on 02-Apr-2018
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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 Dhaliwalindar.dhaliwal@clsa.com+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.
7/27/2019 CLSA Hartalega 1Q2014 b
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Defying gravity Hartalega - BUY
7 August 2013 indar.dhaliwal@clsa.com 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
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Defying gravity Hartalega - BUY
7 August 2013 indar.dhaliwal@clsa.com 3
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
7/27/2019 CLSA Hartalega 1Q2014 b
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Defying gravity Hartalega - BUY
7 August 2013 indar.dhaliwal@clsa.com 4
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
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Defying gravity Hartalega - BUY
7 August 2013 indar.dhaliwal@clsa.com 5
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
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