Fairly valued; maintain HOLD

3QFY3/16 net profit will be released on 16 Feb and we expect net profit of MYR75-80m (+24%-32% QoQ, +52%-62% YoY), driven by higher sales volume and higher USD/MYR. This would lift 9MFY3/16 net profit to MYR198m-MYR203m, within our expectation. Our TP is raised to MYR5.50 (+15%) as we roll forward our valuation base year to 2017 on unchanged target 25x PER. Trading at 28x 2017 PER, we think future earnings growth has already been priced-in. Maintain HOLD.

Full take-up for new capacity

Hartalega’s new plant 1 and 2 at its Sepang site will achieve full commercialisation in Feb 2016, boosting its total capacity to 22b pieces p.a. (+54% from 2014). We understand that the new capacity is already fully sold with new orders from existing and new customers in the developed markets (US, Germany, UK and Japan), hence, supporting earnings growth in FY3/16. Additionally, plant 3 and 4 (total capacity: +8b pieces p.a.; or +36% post plant 1 and 2) will commercialise progressively from Jun 2016 and full commercialisation by Jun 2017.

Benefitting from stronger USD

While USD/MYR appreciated 7% QoQ and 27% YoY in 3QFY3/16, we think the margin expansion will be less prominent for Hartalega compared to its latex-skewed peers due to: (i) a higher USD-denominated cost with imported rubber (especially NBR) accounting for c.37% of total cost; (ii) speedier cost pass-through for nitrile gloves (vs. latex gloves) given the competitive landscape; (iii) locked in forex for 10 months for one of its key customers. But, we understand that Hartalega aims to procure more latex locally and reduce the tenure of its sales contracts.

Rolling forward valuation

We maintain our earnings forecasts, which assumed for USD/MYR rate of 4.10 in FY3/16-18. Our TP is, however, raised to MYR5.50 (+15%), as we roll forward our valuation to 2017 based on unchanged target PER of 25x.

Source: Maybank Research - 13 Jan 2016