Summary

• Hartalega Holdings Bhd’s (HARTA) 2QFY23 core net profit tumbled 96.9% YoY to RM28.3m, mainly impacted by the on-going normalisation of average selling prices (ASP) and lower sales volume. Revenue for the quarter sank 70.9% YoY to RM584.6m.

• For 1HFY23, cumulative core net profit plummeted 96.3% YoY to RM116.6m. The figure accounts to 32.7% of our core net profit forecast of RM356.9m and 36.7% of consensus expectations of RM317.9m. The variance is mainly due to the extended period of ASP normalisation and weaker-than-expected sales volume.

• During the quarter, we gather that average plant utilisation rate fell to 49.0% (vs. 69.6% recorded in 1QFY23), impacted by the competitive landscape environment. We reckon that plant utilisation rate may stay around 50.0% in subsequent quarters as demand has yet to catchup with the influx of supply from both the new gloves players and existing gloves players’ capacity expansions in recent years.

• Given the subpar plant utilisation rate, expansion plan under NGC 1.5 will remain pause over the foreseeable future. For the time being, key focus will be towards the improvement of production efficiency through adoption of digitalisation and energy efficient processes.

• We gather that blended ASP only fell -1.7% QoQ in 2QFY23. The slower magnitude of price normalisation suggest that ASP may have bottomed. Moving forward, we expect ASP to trade around current levels, before demonstrating mild signs of revival towards mid-to-end 2023, following China’s reopening of economy and purchasers’ inventory levels from previous stockpiling activities dialed down.

• The weakening ringgit against the USD (RM4.75 : USD1.00) remains favourable for the export-oriented glovemakers, which may provide some alleviation to the margins that was impacted by the rising operational costs. Still, we remain cautious on the volatility in raw material prices, cost-push inflationary factors arising from higher natural gas, electricity costs, labour shortages and threat of stiff competition that are dimming the prospects for any potential major improvement.

Valuation & Recommendation

• We slashed our earnings forecast by 49.0% and 46.8% to RM181.9m and RM231.2m for FY23f and FY24f respectively, adjusting to the weaker plant utilisation rate. Following the earnings revision, we downgrade HARTA to SELL (from Hold), with a lower target price of RM1.69.

• Our target price is derived by ascribing a targeted PER of 25.0x to their rolled over FY24f EPS of 6.7 sen. The ascribed targeted PER represents -0.5 SD against 5-year historical mean average.

• Following the depressed share price, we reckon that HARTA (ranked 40th in terms of market capitalisation at present) is running a risk of being excluded from the FBM KLCI component list in the upcoming semi-annual index review tentatively on 21st November 2022.

• Risks to our recommendation include stronger-than-expected ASP, quicker-than-expected recovery in sales, as well as a stronger USD against the ringgit. The latter could result in margins expansion as HARTA’s sales are mainly export-oriented.

Source: Mplus Research - 9 Nov 2022