Investment Highlights

• We downgrade Hartalega Holdings (Hartalega) to HOLD from BUY as its share price has exceeded our unchanged fair value of RM3.20/share. Our fair value is based on a CY25F target PE of 30x (0.25x standard deviation (SD) above the 10-year average of 27x) and a 3% premium for an ESG rating of 4 stars. We think most of the positives have been priced in while US import tariffs on China’s gloves will only be imposed in 2026.

• Hartalega’s FY24 core net profit (CNP) of RM49mil (afte excluding RM47mil one-off severance payment recognised in 1QFY24 and RM20mil reversal of severance compensation in 3QFY24) was below our expectations but within consensus The result was 20% below our full-year core net profi forecast. Hence, we trim Hartalega’s FY25F-FY26F earnings by 23%-25% to reflect slower global demand recovery.

• The weaker-than-expected earnings stemmed from a 24% decline in revenue to RM1.8bil in FY24 from RM2.4bil in FY23. We attribute the fall in revenue to lower sales volume of 18.9bil pcs in FY24, a 16% reduction from 22.5bil pcs in FY23.

• Global glove demand has been unexciting post-pandemic due to supply chain stock adjustments and excess stockpiles. In 2023, global glove demand dropped to 269bil pcs (-19%) from 331bil pcs FY22.

• No final dividend was declared for FY24 even though Hartalega posted a strong net cash position of RM1.4bil a end-FY24.

• QoQ, sales volume rose 24% to 5.6bil pcs in 4QFY24 from 4.5bil pcs in 3QFY24, driving net profit to RM21mil from barely breaking even in the previous quarter. However, 4Q24 PAT margin almost halved QoQ to 2.9% due to higher operating cost (+34% QoQ). This was due to increased raw materia prices (+2% QoQ) and production ramp-up cost. COG per 1K units of gloves in 4QFY24 was RM97/1K pcs (+2% QoQ) vs 94.5/1Kpcs in 3QFY24.

• Hartalega’s 4QFY24 blended ASP inched up to US$19.4 21.4/1K pcs (+2% QoQ). Hartalega guided that 1QFY2 blended ASP will be higher at US$20-22.5/1K pcs, a 5% increase QoQ.

• We project Hartalega’s FY25F earnings to be stronger, underpinned by:
  
  i) stronger order pipeline from the commencement ofinventory replenishment cycle, and
  
  ii) lower cost structure from the decommissioning of BestariJaya plant.

• Valuation-wise, Hartalega is currently trading at a fully-valued FY26F PE of 40x, above its pre-pandemic FY18-FY19 average of 34x.

Source: AmInvest Research - 23 May 2024