AmWatch - Hartalega Holdings : Supported by strong USD and progress at NGC BUY, 3 Apr 2015

STOCK FOCUS OF THE DAY

Hartalega Holdings : Supported by strong USD and progress at NGC         BUY

We maintain BUY on Hartalega Holdings and raise our fair value to RM9.40/share to reflect our higher fully-diluted FY16F PE target of 27x (2.5 SD above its 5-year mean).

We recently visited Hartalega’s Next Generation Integrated Glove Manufacturing Complex (NGC) in Sepang and came away reassured of its future prospects as construction works appear to be progressing well.

The NGC is a RM2bil 8-year investment which will raise its installed capacity to 42bil pcs p.a. by FY20 (8-year CAGR of +15%).

We are leaving our FY15F-FY17F earnings forecasts unchanged. Hartalega is expected to end its FY15F on a lower note (-13% YoY) due to the lack of new capacity, price competition, and high NGC start-up costs. That said, earnings are expected to pick up from FY16F (+33% YoY) onwards.

Since our upgrade to BUY in December 2014, the stock has rallied by 26%, spurred partly by the sharp appreciation of the USD vs. the RM (+5%). We believe that the imminent US rate hike will continue to exert further downward pressure on the RM.

As such, we expect valuations of the rubber glove players like Hartalega to remain inflated as investors seek a safe haven from the weakening RM and other GST-affected industries. The stock is currently trading at a fully-diluted FY16F PE of 24x.

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