Summary

• Hartalega’s 4QFY22 net loss stood at RM197.9m vs. a net profit of RM1.12bn recorded in the previous corresponding quarter, mainly dragged down by normalisation of ASP that offset the better sales volume, coupled with the provision of Prosperity Tax (Cukai Makmur). Revenue for the quarter sank 57.9% YoY to RM968.7m.

• Full year core net profit at RM3.63bn is line with our expectations and amounted to 109.7% of consensus forecast of RM3.31bn. A third interim dividend of 3.5 sen per share, payable on 9th June 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, Plant 8 under NGC 1.5 is largely on track for commencement in 4Q22. Upon completion, the expansion will be equipped with 4 plants is expected to boost annual production capacity to by additional 19.0bn pieces to 63.0bn pieces.

• We gather that plants utilisation rate has recovered as production activity resume uninterrupted. Moving forward, we expect utilisation rate to hover at current levels for FY23f. We were also guided that ASP trend appears to have stabilised, which we expect current prices that is above pre-pandemic level to hold throughout FY23f.

• Meanwhile, the weakening ringgit against the USD remains a boon for the export oriented glovemakers. In bid to keep margins on the higher level, factory automation is on the way, which aims to reduce headcount by 20.0%. Still, we remain cautious on the rising raw material prices, on-going shipping constraints, electricity cost, labour shortages and increasing competition from local and overseas players.

• 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

• We trimmed our earnings forecast by 22.7% to RM802.6m for FY23f, taking into account for the rising cost of production and elevated raw material prices and introduced FY24f numbers with net profit expected at RM906.3m. We downgrade our recommendation on Hartalega to HOLD (from BUY) with a lower target price of RM4.69.

• Our target price is derived by ascribing a targeted PER of 20.0x to their revised FY23f EPS of 23.4 sen. The ascribed targeted PER represents -0.5 SD against 5-year historical mean average.

• 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 - 11 May 2022