Hartalega Holdings Bhd RM5 . 7 7

Stock Codes

Masa 5168 / HARTA

Bloomberg HART MK

Stock & Market Data

KLCI 1534.79

Listing Main Board

Sector Industrial Products

Syariah Compliance Yes

Par Value RM0.50

Issued Shares 363.6m

Market Capitalisation RM2097.7m

YTD Performance +8.0%

52-week Hi/Lo RM6.08 / RM4.04

3M Average Volume 0.3m

Estimated Free Float 30%

Major Shareholders: -

Hartalega Industries Sdn Bhd 50.6%

Budi Tenggra Sdn Bhd 7.2%

Key Indicators @ FY11

ROA 30.2%

ROE 38.5%

Net Debt/Equity Net cash

Price / Asset per share 4.2x

Another excellent quarter

Higher revenue & EBIT

4QFY11 grew by 2.3% and 6.4% respectively, boosted

by an increase in demand and output. As the sales mix

is skewed towards nitrile gloves (~83%), which is

predominantly sold to the medical sector, demand has

been increasing due to two factors. They are 1. Usage

of glove is mandatory for disease control, and 2.

Switching over to using nitrile gloves due to lower

selling prices vis-à-vis natural latex gloves.

Revenue and EBIT for

Margin above 34%

from more players switching to make more nitrile

gloves, Hartalega’s 4Q EBIT margin was maintained

above 34%, bringing FY11’s margin of 33.4%.

Despite the intensifying competition

All round improvement

improved 28.5% while EBIT improved by 35.5% on

account of an improvement of 1.7% point in EBIT

margin. The revenue and EBIT gain was due to

continuous expansion in production capacity, higher

demand for its products, effective cost control and

improvement to the production process.

For the year, revenue

Raw material price higher

been on an up trend (from USD2000/tonne to USD2200/tonne from Nov 2010 to Feb 2011) due to the higher

price of oil, while natural latex price has dropped to RM9.45/kg of late from its peak of RM10.93/kg a month

ago. This may pose a challenge to Hartalega as the competitive advantage arising from lower selling price of

nitrile gloves would slowly revert back to natural rubber gloves if the price trend of the raw materials persists.

Butadiene rubber price has

FY Mar / RM'm Q4FY11 Q4FY10 Chg YoY Q3FY11 Chg QoQ FY11 FY10 Chg YoY

Revenue 192.5 163.4 17.8% 188.1 2.3% 734.9 571.9 28.5%

Operating expenses

Other operating income 4.3 0.3 - 1.7 - 8.7 3.4 -

EBIT 66.9 57.4 16.5% 62.8 6.4% 245.7 181.3 35.5%

Finance costs

Profit before tax 66.3 56.6 17.2% 62.2 6.6% 243.3 177.9 36.7%

Taxation

Net profit for the period 52.4 46.5 12.9% 49.2 6.6% 190.2 143.3 32.8%

Profit attributable to:

Owners of the company 52.4 46.4 12.9% 49.2 6.5% 190.2 143.1 32.9%

Minority Interest 0.0 0.0 -21.7% 0.0 350.0% 0.0 0.2 -72.0%

(130.0) (106.3) 22.3% (127.0) 2.3% (497.9) (394.0) 26.4%(0.6) (0.8) -30.9% (0.6) -9.7% (2.5) (3.4) -27.0%(13.9) (10.1) 37.1% (13.0) 6.6% (53.1) (34.7) 53.0%

EPS - Basic (sen) 14.4 19.2 -24.8% 13.5 6.4% 52.3 39.3 33.0%

EBIT margin 34.7% 35.1% 33.4% 33.4% 31.7%

Net profit margin 27.2% 28.4% 26.2% 25.9% 25.1%

Tax rate 20.9% 17.9% 20.9% 21.8% 19.5%

Not so much a concern

by other manufacturers to make more nitrile gloves would slow down, reducing concerns on a supply glut.

Secondly, we feel nitrile gloves users are unlikely to switch back to using natural rubber gloves after getting

used to the “feel” of the gloves and in addition the absence of protein allergy, unlike in natural rubber gloves.

Expanding again in FY12

production lines thereby boosting capacity by 3bn pieces p.a. for a total capacity of 9bn pieces p.a. In

addition, a 6th production plant is being planned and construction would commence by the middle of 2011.

The new plant will boost production capacity by an additional 3bn pieces p.a., to bring total capacity to 12bn

pieces p.a.

Hartalega’s 5th production plant was completed in FY11, adding another 10

Demand is still increasing

nitrile gloves arising from the switch from natural rubber gloves. The demand started increasing in 2009

when the gap between the selling prices of nitrile narrowed with that of natural rubber and when it became

lower, demand took off as more users switched over. Despite indications of a reversal of the trend, we

believe that in the future, there would be a more balance demand mix of nitrile and natural rubber gloves

versus the current lopsided mix, as users shy away from the fluctuating prices of natural rubber gloves

caused by the volatile rubber latex price.

The expanded capacity would be used to satisfy the increasing demand for

Fair value of RM7.34

For Hartalega, we are using a discount of 20% (versus 30% for the other glove companies) to Top Glove’s

PER rating of 15x to derive its fair value. The discount was to account for lower capitalisation of the

company and the smaller size of the company (9bn pcs p.a capacity versus Top Glove’s 22.5bn). The lower

discount viv-a-vis the other manufacturers is due to its market leadership in the nitrile segment – Hartalega

is the largest manufacturer in the country and the second largest manufacturer in the world.

Based on a PER of 12x, the fair value, basis FY12 EPS of 61.2sen, is RM7.34. A 6sen 3

pending and the shares would go ex- on 24

rd interim dividend isth May.

FY Mar / RM'm FY 2008A FY 2009A FY 2010A FY 2011E FY 2012F

Operating revenue 257.6 443.2 571.9 734.9 845.2

Cost of sales

(195.9) (332.9) (363.8) (457.1) (528.2)

Gross profit 61.7 110.3 208.1 277.8 316.9

Other operating income 37.3 24.1 3.4 8.7 8.0

Distribution costs

(6.3) (10.7) (10.0) (13.8) (16.9)

Administrative costs

(13.1) (14.0) (16.7) (22.0) (22.0)

Other operating costs

(2.8) (11.8) (3.8) (5.0) (5.0)

EBIT 76.7 97.9 181.2 245.7 281.0

Finance costs

(0.7) (2.4) (3.4) (2.5) (3.0)

Profit before taxation 76.0 95.5 177.8 243.3 278.0

Taxation

(6.4) (11.0) (34.7) (53.1) (55.6)

Profit for the year 69.6 84.5 143.1 190.2 222.4

Minority interests

Profit to shareholders 69.6 84.5 142.9 190.3 222.4

(0.1) (0.0) (0.2) 0.0 0.0

EPS (sen) 21.29 23.25 39.32 52.31 61.17

PER 27.1 24.8 14.7 11.0 9.4

EBIT margin 29.8% 22.1% 31.7% 33.4% 33.3%

Pretax margin 29.5% 21.5% 31.1% 33.1% 32.9%

Net profit margin 27.0% 19.1% 25.0% 25.9% 26.3%

Tax rate -8.4% -11.5% -19.5% -21.8% -20.0%However, we are of the opinion that the impact would be muted, as current switch