Investment Highlights

• We maintain HOLD on Hartalega Holdings (Hartalega) with a lowered fair value of RM4.55/share (from RM5.75/share previously) based on a rolled-forward FY24F PE of 18x at parity to its 3-year median PE, and incorporating a 3% premium for an ESG rating of 4 stars.

• We reduce FY23F–FY24F earnings by 5%–10% from a 10%- point reduction in average plant utilisation to 65%–70%, as guided by management. This includes the commencement of the first line of its next generation integrated glove manufacturing complex (NGC) 1.5 (plant 8–11) by October this year.

• Recall that this is part of the RM1.5bil capex allocated for 4 plants in Sepang which will each have 12 production lines with an hourly capacity of 45K pcs, adding 43% or 19bil pcs to the group’s existing annual installed capacity of 44bil pcs.

• Our FY23F earnings drop of 71% stem from the downtrend in average glove selling price (ASP), which has fallen by 36% QoQ and 61% YoY to US$32 per thousand pcs in 4QFY22 (Exhibits 1 & 2). Together with the ongoing supply chain/logistics disruptions and higher raw material costs amid rising competition from the entry of new suppliers, we remain bearish on the group’s earnings prospects.

• Even so, Hartalega’s FY22 core net profit of RM3,261mil (+13.5% YoY), which excludes non-core foreign exchange losses, came in within our and consensus expectations. While the FY22 DPS of 73.3 sen was 29% above our projection, we maintain our FY23F–FY24F payout ratio assumption of 60% as guided by management.

• 4QFY22 revenue was remarkably resilient, dropping by only 4% QoQ as the ASP contraction was largely offset by a 33% QoQ surge in sales volume to 7.3bil pcs. Nevertheless, the 12%-point QoQ drop in EBITDA margin to 24% together with increased raw material costs dragged 4QFY22 pretax profit by 38% QoQ to RM218mil.

• As management had earlier guided, the full impact of the oneoff prosperity tax was recognised with a RM400mil charge in 4QFY22, translating to a FY22 effective rate of 30% vs. 24% in FY21. This reversed 4QFY22 to a loss of RM209mil from a net profit of RM255mil in 3QFY22.

• However, we see some silver linings in the normalisation of Hartalega’s effective tax this year and the reopening of borders with the relaxation of movement restrictions that will largely alleviate migrant labour constraints currently. Additionally, some demand recovery may occur as customers clear inventories built up during the peak of the pandemic.

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  Management aims to pass on some of the higher raw material and inflationary costs to customers in 1QFY23. Nevertheless, we remain cautious on the industry’s longer term prospects amid the substantive expansions of major players’ capacities, notably, Top Glove allocating RM2bil annually to double its capacity by 2025, and growing competition from China-based manufacturers. While this could be tempered by higher glove consumption from emerging markets with low penetration rates presently together with heightened post-pandemic hygiene and health consciousness, visibility in supply-demand dynamics are clouded against the headwinds of China’s ongoing lockdowns and global stagflationary environment.

• The stock currently trades at fair FY24F PE of 18x, near its 3-year median with a decent dividend yield of 4%.

Source: AmInvest Research - 11 May 2022