Malaysia Company Focus

Hartalega Holdings Berhad

Refer to important disclosures at the end of this report

Bloomberg: HART MK EQUITY | Reuters: HTHB.KL

DBS Group Research . Equity

7 Aug 2013

HOLD RM6.80
RM6.80 KLCI : 1,785.14

Strong fundamentals priced in

(Downgrade from Buy)

Price Target : 12-Month RM 6.60
Reason for Report : Downgrade rating and 1QFY14 Results
DBSV vs Consensus: In line with consensus
Analyst
HON Seow Mee +603 2711 2222
seowmee@hwangdbsvickers.com.my

Price Relative
RM

Relative Index

7.5
260
6.5

240
220

5.5

200
180

4.5

160
3.5

140
120

2.5

100
1.5
Aug-09

Aug-10

Aug-11

Hartalega Holdings Berhad (LHS)

Aug-12

80
Aug-13

Relative KLCI INDEX (RHS)

Share price has reached our TP, downgrade to

HOLD; our RM6.60 TP (18x CY14 EPS) is intact

1QFY14 net profit of RM63m was in line with

our and consensus estimates; margin was stable

Expect moderate earnings growth in FY14,

before picking up in FY15

Share price has reached our TP. The share price has
risen since our report on 10 Jun and has reached our
TP. We now downgrade the stock to HOLD, but
maintain our RM6.60 TP. Hartalegas fundamentals
remains strong i.e. robust demand for nitrile gloves and
improving efficiency and line speed will continue to
drive earnings growth and sustain margins despite
competition, and it remains the most profitable glovemaker in the sector with the highest margins (30% vs
12% peers average) and ROE (31% vs 17% peer
average). Current valuation at 19x CY14 EPS has priced
in the positives. Our TP is pegged to 18x CY14 EPS (fully
diluted), similar to our valuation for Top Glove.

Forecasts and Valuation

FY Mar (RM m)

Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
EPS (sen)
EPS Pre Ex. (sen)
EPS Gth (%)
EPS Gth Pre Ex (%)
Diluted EPS (sen)
Net DPS (sen)
BV Per Share (sen)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (sen
sen):
sen :
Other Broker Recs:

2013A
2013A

2014F
2014F

2015F
2015F

2016F
2016F

1,032
336
306
235
235
32.3
32.3
11
11
32.3
14.5
105.3
21.1
21.1
15.6
14.2
2.1
6.5
CASH
33.9

1,248
377
340
262
262
32.6
32.6
1
1
32.6
14.7
113.5
20.8
20.8
15.8
13.9
2.2
6.0
CASH
31.2

1,471
450
398
302
302
37.7
37.7
16
16
37.7
17.0
134.3
18.0
18.0
15.4
11.6
2.5
5.1
CASH
30.5

1,700
520
453
344
344
42.9
42.9
14
14
42.9
19.3
157.9
15.8
15.8
13.5
9.9
2.8
4.3
CASH
29.4

na
34.8
B: 7

na
38.1
S: 3

na
43.7
H: 9

ICB Industry : Health Care

ICB Sector: Health Care Equipment & Services
Principal Business: Latex examination gloves, nitrile gloves and
technical rubber products manufacturer

1QFY14 net profit was flat q-o-q. Sales volume

growth remained robust at c.5% q-o-q (vs 2% in
4QFY13). Average selling prices (ASP) fell 10% q-o-q as
lower raw material costs were passed on to customers.
However, it booked RM6m net forex losses and change
in fair value of forward exchange contracts in 1QFY14.
Despite this, operating margin was stable at 30%.
Upside risk to forecast earnings is sustainable USD
strength. We expect moderate earnings growth in
FY14, before accelerating to 16% in FY15 as Hartalega
commissions its new capacities at NGC. Hartalega
should benefit from lower raw material prices and
stronger USD/RM in the short term, before they are
passed on to customers
At A Glance
Issued Capital (m shrs)
Mkt. Cap (RMm/US$m)
Major Shareholders
Hartalega Industries (%)
EPF (%)
Free Float (%)
Avg. Daily Vol.(000)

739
5,024 / 1,555
50.5
6.1
49.5
792

Source of all data: Company, DBS Vickers, Bloomberg Finance L.P

In Singapore, this research report or research analyses may only be distributed

to Institutional Investors, Expert Investors or Accredited Investors as defined in the
Securities and Futures Act, Chapter 289 of Singapore.
www.dbsvickers.com
ed: SGC / sa: WMT

Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd
(DBSVR), are to contact DBSVR at +65 6398 7954 in respect of any matters arising
from or in connection with this report.

Company Focus
Hartalega Holdings Berhad

27%

27%

30%

30%

30%

30%

28%

27%

27%

35%

32%

33%

35%

33%

35%
30%

22%

26%

28%
17%

25%
20%
15%

15%

10%

10%

5%

5%

Top Glove

Supermax

Kossan

1QCY13

4QCY12

3QCY12

2QCY12

1QCY12

4QCY11

3QCY11

2QCY11

1QCY11

4QCY10

3QCY10

2QCY10

1QCY10

4QCY09

3QCY09

2QCY09

1QCY09

4QCY08

FY15F

FY14F

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

2Q09

1Q09

4Q08

3QCY08

1QCY08

0%

0%

2QCY08

20%

15%

25%

20%

30%

Hartalegas operating margin remains highest among peers

40%

27%

35%

32%

31%

40%

32%

Hartalega: Operating
Operating margin
margin remains resilient in 1QFY14

Hartalega

Rolling forward PE band

Stronger USD will lift export revenue

PE

USD/MYR

25.00

3.90
3.70

20.00
+2SD

3.50
3.30

15.00
+1SD

3.10
10.00

2.90

Mean

2.70
5.00

Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13

2.50

-1SD
-2SD

Source: Companies, Bloomberg Finance L.P, DBS Vickers

Peer comparison
Company

Share

Target

Market

Price

Price
Price

Cap

PE (x)

PE (x)

PE (x)

P/BV

Yield

ROE

(RM)

(RM)

(US$m)

CY12

CY13

CY14

(x)

(%)

(%)

Top Glove

6.02

Supermax
Kossan Rubber
Hartalega

7.20

1,208

18.1

16.8

2.26

NA

497

12.6

6.10

4.50

629

18.7

6.80

6.60

1,626

Sector Average

Prices as of 5 Aug 2013

NA (not applicable); NR (not rated)

Source: Bloomberg Finance L.P, DBS Vickers

Page 2

Div

15.1

2.7

2.9

16

10.9

9.8

1.6

2.6

15

16.5

14.3

1.8

1.9

18

22.0

21.3

19.2

5.2

2.3

31

17.8

16.4

14.6

2.8

2.4

20

Aug-13

May-13

Feb-13

Nov-12

Aug-12

May-12

Feb-12

Nov-11

Aug-11

May-11

Feb-11

Nov-10

Aug-10

Feb-10

May-10

Nov-09

Aug-09

May-09

Feb-09

Nov-08

USDMYR Curncy

Aug-08

May-08

0.00

Company Focus
Hartalega Holdings Berhad
Key Assumptions
FY Mar

Sensitivity Analysis
2012A
2012A

2013A
2013A

2014F
2014F

2015F
2015F

2016F
2016F

9.8
82.9
4.7
8.3

11.1
90.4
4.4
6.3

13.6
92.0
4.4
6.4

16.1
92.0
4.4
6.1

18.6
92.0
4.5
5.8

2012
2012A

2013A
2013A

2014F
2014F

2015F
2015F

2016F
2016F

506
11
106
281
27
931

597
14
105
283
33
1,032

776
18
116
297
41
1,248

952
23
133
312
52
1,471

1,126
28
153
327
65
1,700

FY Mar

2012A
2012A

2013A
2013A

2014F
2014F

2015F
2015F

2016F
2016F

Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
PrePre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)

931
(673)
258
2
260
0
0
(2)
0
259
(57)
0
0
202
202
281

1,032
(731)
301
6
307
0
0
(1)
0
306
(71)
0
0
235
235
336

1,248
(913)
334
6
340
0
0
(1)
0
340
(78)
0
0
262
262
377

1,471
(1,078)
393
6
399
0
0
(1)
0
398
(96)
0
0
302
302
302
450

1,700
(1,252)
447
6
453
0
0
(1)
0
453
(109)
0
0
344
344
520

26.7
5.9
5.9
6.0

10.8
19.4
17.8
16.4

20.9
12.4
10.9
11.4

17.9
19.4
17.1
15.6

15.6
15.4
13.7
13.7

27.7
28.0
21.7
36.2
29.0
32.3
45.3
149.9

29.1
29.7
22.7
33.9
27.7
31.1
45.0
339.7

26.8
27.3
21.0
31.2
25.0
29.1
45.0
570.4

26.7
27.1
20.6
30.5
24.1
28.7
45.0
668.1

26.3
26.7
20.2
29.4
23.5
27.9
45.0
759.8

Capacity (bln pcs)

Utilisation (%)
Nitrile latex (RM/kg)
NR latex (RM/kg)

2012

Nitrile costs +/- 1%

Energy costs +/- 1%

Segmental Breakdown
FY Mar

Revenues (RM m)
North America
South America
Asia
Europe
Others
Total

Net Profit +/- 1.8%

Net Profit +/- 0.2%

North America remained

Hartalegas largest
market (58% of total
sales) but it is making
inroads in Asia (10% of
total sales).

Income Statement (RM m)

Source: Company, DBS Vickers

Margins Trend
31.0%
29.0%
27.0%
25.0%
23.0%
21.0%
19.0%
2012A

2013A

Operating Margin %

2014F

2015F

2016F

Net Income Margin %

Competition in nitrile
gloves will pressure
margins, but enhanced
productivity and efficiency
will mitigate the impact.

Page 3

Company Focus
Hartalega Holdings Berhad
Quarterly / Interim Income Statement (RM m)
FY Mar

1Q2013
1Q2013

Revenue Trend

2Q2013
2Q2013

3Q2013
3Q2013

4Q2013
4Q2013

1Q2014
1Q2014

300

16%
14%

250

Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)

3.1
0.7
0.7
1.0

28.3
28.3
21.5

29.4
30.0
23.0

29.3
30.3
23.3

29.5
30.2
23.1

31.0
29.5
22.6

2012A
2012A

2013A
2013A

2014F
2014F

2015F
2015F

2016F
2016F

Balance Sheet (RM m)

FY Mar

380
0
0
163
98
108
10
758

535
0
8
182
87
120
5
936

668
0
8
225
107
145
5
1,158

787
0
8
258
126
171
5
1,354

891
0
8
323
146
198
5
1,570

ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholders Equity
Minority Interests
Total Cap. & Liab.

13
30
43
12
41
620
1
758

8
56
51
4
50
766
1
936

8
70
116
4
50
909
1
1,158

8
82
133
4
50
1,076
1
1,354

8
95
146
4
50
1,265
1
1,570

142
139
39.6
17.8
45.5
1.3
4.4
3.2
CASH
CASH
244.4
23.4

104
170
40.2
22.3
47.8
1.2
3.4
2.6
CASH
CASH
1,537.4
20.3

72
213
38.8
26.2
40.4
1.2
2.5
1.9
CASH
CASH
1,521.0
16.0

87
246
39.2
26.9
41.5
1.2
2.5
1.9
CASH
CASH
1,521.0
14.7

107
311
39.6
27.2
41.9
1.2
2.7
2.1
CASH
CASH
1,521.0
NA

Source: Company, DBS Vickers

Page 4

2%
0%
0

-2%

Revenue

Revenue Growth % (QoQ)

Revenue grew 3% q-o-q

despite ASP falling 10% q-oq due to strong volume
growth in the quarter (+5%)

Booked RM6m forex losses

and change in fair value of
forward exchange contracts.

Asset Breakdown (2014)

Net Fixed Assets

Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets

Non-Cash Wkg. Capital

Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)

4%

50

1Q2014

3.9
3.7
3.7
2.9

6%
100

4Q2013

1.8
2.7
2.7
3.4

8%
150

3Q2013

3.0
9.0
9.0
9.7

10%

2Q2013

3.1
8.3
8.3
6.7

12%
200

1Q2013

278
(192)
86
(4)
82
0
0
0
0
82
(19)
0
63
63
82

4Q2012

270
(190)
80
2
81
0
0
0
0
81
(19)
0
62
62
81

3Q2012

260
(184)
76
3
79
0
0
0
0
78
(18)
0
61
61
79

2Q2012

255
(180)
75
2
77
0
0
0
0
76
(18)
0
59
59
77

1Q2012

248
(178)
70
0
70
0
0
0
0
70
(16)
0
53
53
70

4Q2011

Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
PrePre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA

Net Fixed
Assets 58.3%

Debtors 12.7%

Assocs'/JVs 0.0%
Inventory 9.4%
Bank, Cash
and Liquid
Assets 19.6%

RM182m net cash as

of Jun-13 vs RM170m
as of Mar-13

Company Focus
Hartalega Holdings Berhad

Cash Flow Statement (RM m)

Capital Expenditure

FY Mar

2012
2012A

2013A
2013A

2014F
2014F

2015F
2015F

2016F
2016F

Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (sen)
Free CFPS (sen)

259
29
(49)
0
(44)
7
201
(60)
0
0
0
0
(60)
(87)
(15)
0
7
(95)
0
46
35.5
20.4

306
37
(59)
0
36
(2)
317
(187)
0
0
0
(7)
(194)
(99)
(12)
0
7
(104)
0
19
38.7
17.9

340
52
(14)
0
(32)
0
345
(185)
0
0
0
0
(185)
(118)
0
0
0
(118)
0
43
47.1
20.0

398
66
(78)
0
(33)
0
354
(185)
0
0
0
0
(185)
(136)
0
0
0
(136)
0
33
48.2
21.1

453
81
(96)
0
(34)
0
405
(185)
0
0
0
0
(185)
(155)
0
0
0
(155)
0
65
54.7
27.4

200
180
160
140
120
100
80
60
40
20
0
2012A

2013A

2014F

2015F

2016F

Capital Expenditure (-)

45% dividend payout

Source: Company, DBS Vickers

Target Price & Ratings History

7.03

RM

1:
2:

Cl o s i n g Ta rg e t
Pri c e
Pri c e
08 Aug 12
4.50
4.70
07 Nov 12
5.01
4.70

3:

23 Nov 12

4.82

4.70

Hold

4:
5:

15 Jan 13
06 Feb 13

4.93
4.64

4.70
4.80

Hold
Hold

6:

20 Feb 13

4.75

4.80

Hold

7:

23 Apr 13

5.27

5.50

Hold

8:
9:

09 May 13
10 Jun 13

5.67
5.87

5.50
6.60

Hold
Buy

S.No .
6.53
6.03

8
9

5.53

7
2

5.03

6
3

4.53

Da te

R a ti n g
Hold
Hold

5
1

4.03
Aug-12

Dec-12

Apr-13

Aug-13

Not e : Share price and Target price are adjusted for corporate actions.

Source: DBS Vickers

Page 5

Company Focus
Hartalega Holdings Berhad

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

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Company Focus
Hartalega Holdings Berhad

COMPANYCOMPANY-SPECIFIC / REGULATORY DISCLOSURES

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