KUALA LUMPUR (Feb 7): Hartalega Holdings Bhd's financial results for the nine months ended Dec 31, 2023 (9MFY2024) fell short of analysts' expectations — some of whom cut their earnings forecasts for the glove company — due to lower-than-expected sales volume.

MIDF Amanah Investment Bank Bhd, in a note, highlighted the group's core net loss for 9MFY2024 amounted to RM11.8 million (excluding a one-time item of -RM9.4 million). This result deviates from the research house's full-year FY2024 (ending March 31) estimate of a core net profit of RM40.1 million and consensus forecast of RM49.1 million.

The negative deviation was primarily stemming from weaker-than-expected sales volume due to logistical challenges resulting from the ongoing Red Sea crisis, and lower-than-expected average selling prices (ASPs) owing to continuous price competition among industry players.

“We lowered our earnings forecast for FY2024F by -48.6% after factoring in lower sales volume due to delays in delivering customer orders amidst the ongoing Red Sea crisis and lower ASPs of US$19.80 (RM94.40)/1k pieces from US$20.50/1k pieces due to continuous price competition not only from Chinese glove makers but also from Malaysian and Thai glove makers.

“[However], we kept our earnings forecast for FY2025-2026F unchanged, considering the anticipated customer restocking activities starting from FY2025 onwards due to the depletion or expiration of inventory purchased during the pandemic period,” said MIDF.

Meanwhile, AmInvestment Bank Bhd stated that Hartalega's core earnings for 9MFY2024, amounting to RM28 million (after excluding a one-off severance payment of RM47 million recognised in 1QFY2024 and a RM20 million reversal of severance compensation in 3QFY2024), did not meet the research house's expectations.

In view of the poor performance, AmInvestment adjusted its FY2024 core net profit forecast downward by 34%, revising it to RM62 million from the previous estimate of RM93 million, to reflect the Red Sea-related impact in 3QFY2024 and longer time to scale up production in 4QFY2024.

AmInvestment maintained its FY2025-FY2026 earnings estimates, based on the assumption that the inventory replenishment cycle will commence in the first quarter of calendar year 2024 (1QCY2024) and a more efficient cost structure following the complete decommissioning of Bestari Jaya by the end of FY2024.

Similarly, RHB Research has taken a similar stance by reducing its FY2024-FY2025 earnings estimates by 64%-30% to account for weaker-than-expected volumes and less aggressive ASP hikes.

“Our FY2024 sales volume assumption takes into consideration the 600 million in backlog orders, which will be recognised by 4QFY2024,” said RHB, which trimmed its target price (TP) for Hartalega to RM3 from RM3.25.

“But we believe the worst is over, as glove makers’ profitability is set to recover year-on-year by 2024 with greater demand visibility to prevail in 2HCY2024. With the industry’s excess capacity gradually phasing out, we should see demand-supply equilibrium. We also expect the risk of price competition from Chinese peers to gradually subside, premised on rising quality concerns resulting in higher rejection rates from the US Food & Drug Administration, and Chinese players’ pivoting stance towards sustainability.

“All in, we retain our view that gloves demand will continue [to] pick up in the coming quarters, as client inventory levels continue to deplete — this is on top of their glove inventory levels (stockpiled since 2020) approaching their expiry dates (typical shelf life for gloves: 3-5 years),” RHB added.

Another research house, Public Invest, said Hartalega’s current share price has outpaced its fair valuation. The research house also does not foresee any positive earnings surprises in the medium term.

Therefore, Public Invest downgraded its rating to "underperform" from "neutral" with a lower TP of RM2.07 (from RM2.11), based on 1.5 times CY2024 forecast book value per share (near its one-year historical mean). It trimmed Hartalega’s earnings forecasts by 3%-35% for FY2024-FY2025.

Currently, Hartalega has five "buy", five "hold" and eight "sell" calls with a consensus rating of RM2.76, Bloomberg data showed.

The counter, which was among the top 10 losers in Wednesday’s morning trade, dropped 12 sen or 4.51% to RM2.54, giving the group a market capitalisation of RM8.74 billion.