Summary

• Hartalega’s 3QFY22 net profit sank 74.1% YoY to RM259.1m, mainly dragged down by normalisation of ASP and weaker sales volume amid the moderating demand, shipping constrains and the rising supply from major and new competitors. Revenue for the quarter slipped 52.8% YoY to RM1.01bn.

• The reported earnings came at 94.0% of our estimates of RM3.65bn, whilst it amounted to 96.7% against consensus forecast of RM3.55bn. We deem the figures to be in line as we expect the on-going normalisation of ASP, coupled with the “Prosperity Tax” under Finance Act 2021 to impact the final quarter results. An interim dividend of 14.8 sen per share, payable on 9th March 2022 was declared.

• To-date, 8 out of the 9 lines under Plant 7 of NGC have commenced operations (unchanged from the previous quarter) with the remaining line targeted for commissioning in coming months. Moving forward, Hartalega will begin commence operations of Plant 8, which is under NGC 1.5 in October 2022 (postponed from the initial plan in April 2022 due to the moderating demand). The aforementioned expansion with additional 4 plants is expected to boost annual production capacity to by additional 19.0bn pieces to 63.0bn pieces.

• Although workforce has returned in recent months, we note that capacity utilisation has yet to see signs of recovery for Hartalega that was affected by the threat of rising competition. Still, we reckon that ASP may remain above pre-Covid-19 level in subsequent quarters.

• On the brighter note, the weakening ringgit against the Greenback remains a boon for the export-oriented glovemakers. In bid to keep margins on the higher level, factory floors in 3 plants have been fully digitalised and on-going upgrades to step up production efficiency remains in place.

• To-date, 99.0% of Hartalega’s foreign employees have completed the Covid-19 booster dose. Meanwhile, we note that Hartalega maintained its leader position among 91 companies in the health care equipment & supplies industry under the MSCI ESG Rating at “AA”.

Valuation & Recommendation

• Given that the reported numbers deemed to be within our expectations, we made no changes to our earnings forecast and we retained our BUY recommendation on Hartalega with an unchanged target price of RM6.78.

• Our target price is derived by ascribing a targeted PER of 12.0x to their FY23f EPS of 56.4 sen. Meanwhile, Hartalega has now implemented a dividend policy of distributing a minimum 60.0% of annual net profit, after taking into consideration of the one-off special tax under “Prosperity Tax”.

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

Source: Mplus Research - 9 Feb 2022