Summary

• Hartalega Holdings Bhd’s (HARTA) 4QFY23 core net profit slipped 72.8% YoY to RM41.2m, owing to the weaker ASP and sluggish demand due to the overcapacity in the gloves industry. Revenue for the quarter fell 46.8% YoY to RM515.7m.

• For FY23, cumulative core net profit tumbled 96.5% YoY to RM126.0m. The figure accounts to 97.2% of our core net profit forecast of RM129.5m and 79.7% of consensus expectations of RM158.0m.

• Following the one-off impairment of RM347.0m booked during the quarter, we understand that FY24f bottomline will continue to be impacted by c.RM70.0m of impairment for the severance package of employees at Bestari Jaya plant. Still, we expect bottomine core numbers to remain in the black at RM87.3m.

• During the quarter, we gather that average plant utilisation rate rose to 53.6% vs 42.2% recorded in 3QFY23, driven by signs of small green shoots of recovery in demand. Moving forward, HARTA will be embarking onto a 5-year strategic plan that entails operational rationalisation and production efficiency.

• The proposition to decommission of Bestari Jaya plant is essential to consolidate the operations and improve production efficiency in the long run. We expect margins to see improvement from the reduction of operational and depreciation costs. With the Bestari Jaya plant having operational since 2004, it is (i) less efficient (producing 25,000-45,000 pc/hr vs NGC at more than 45,000 pc/hr), (i) requires higher energy and labour cost (c.23.0% higher than NGC plant) and greater need for maintenance cost (c.30.0% higher than NGC plant). Decommissioning may take place gradually from now before fully shut down by December 2023.

• We gather that blended ASP declined -10.4% QoQ in 4QFY23 as the oversupply situation is still largely on the table. Going forward, we reckon that the revision of ASP may remain challenging as purchasers’ inventory levels remain elevated, whilst the excess capacity in recent years has yet to be absorbed in the market. We expect the overcapacity situation to only turn favourable only in end-2024/early-2025.

Valuation & Recommendation

• We made no changes to our earnings forecast, given that ASP remains fairly stable and production utilisation is gradually picking up. Nevertheless, we upgrade our recommendation to HOLD with a higher target price of RM2.05.

• Our target price is derived by ascribing a 1.5x to their FY24f BV of RM1.36. The ascribed targeted price to book is in line with 1-year historical mean average.

• Risks to our recommendation include weaker-than-expected ASP, slower-than-expected recovery in sales, as well as a weaker USD against the ringgit. The latter could result in margins compression as HARTA’s sales are mainly export-oriented.

Source: Mplus Research - 10 May 2023