Investment Highlights

• We maintain our HOLD call on Hartalega Holdings (Hartalega) with a lower fair value of RM5.75 (from RM6.00). We have imputed a 3% premium for an ESG rating of four stars. Our valuation method is unchanged which is based on a PER of 18x FY23F.

• 9MFY22 earnings were below expectations. 9MFY22 earnings of RM3.43bn makes up 83% of ours and 96% of consensus FY22 forecast. We deem the earnings as below expectation due to faster than expected decline in ASP and lower than expected utilization rate.

• 3QFY22 earnings dropped 72% QoQ to RM259m. This is due to ASP decline by 40% QoQ while sales volume slipped 17% QoQ. ASP decline is in line with the market price for gloves which have passed its peak. As for sales volume, we gather that the customers remain cautious in their purchase pattern due to declining ASP coupled with logistic challenges caused by global shipping container shortage.

• Hartalega announced 14.8 sen dividend. Ex-date will be on 23-Feb with payment date on 9-Mar. Operationally, Hartalega near term focus is to improve its efficiency. For 4QFY22, we expect the utilization rate to improve to 60%-65% as compared to 3QFY22’s 52%.

• Earnings estimate cut. FY22/FY23/FY24 earnings has been reduced by 28%/4%/2% to RM3.23b/RM1.06b/RM888m. Blended gloves ASP for FY22/FY23/FY24 has been reduced to USD60/USD26.5/USD26 (from USD62/USD27/USD26). Gloves ASP are quoted in USD/1,000 pieces. We have also reduced our utilization rate assumption.

• Fair Value reduced to RM5.75. The reduction in Fair Value is mainly due to lower earnings estimate.

• Maintain HOLD. The upside is capped as the ASP downtrend continues. Having said that, the downside is also limited as its share price has fallen to below prepandemic level of RM5.83, which was last recorded on 31 Jan 2020.

Source: AmInvest Research - 9 Feb 2022