Summary

• Hartalega Holdings Bhd’s (HARTA) 3QFY23 core net loss stood at -RM31.9m vs. a net profit of RM259.1m recorded in the previous corresponding quarter, mainly dragged by the extended normalisation of average selling prices (ASP), weaker sales volume and higher energy as well as labour costs. Revenue for the quarter slipped 54.1% YoY to RM461.8m.

• For 9MFY23, cumulative core net profit tumbled 97.5% YoY to RM84.7m. The figure accounts to 46.6% of our core net profit forecast of RM181.9m and 53.6% of consensus expectations of RM158.0m. The variance is mainly due to further decline in ASP.

• During the quarter, we gather that average plant utilisation rate fell to 42.2% (vs. 49.0% recorded in 2QFY23), impacted by the competitive landscape environment. We reckon that plant utilisation rate may hover below 50.0% in the subsequent quarters, on the back of the stiff price competition, while stockpiling activities from purchases has yet to see significant drawdown.

• With the plant utilisation rate remains largely below pre-Covid 19 levels at 80-90%, the expansion of NGC 1.5 will remain on hold over the foreseeable future. For the time being, key focus will be towards the improvement of production efficiency through adoption of automation and digitalisation process and energy optimisation to reduce green-house gas emissions.

• Blended ASP declined -8.3% QoQ in 3QFY23. Given the intense market competition, we reckon that ASP may remain under pressure, before mild signs of revival towards mid-to-end 2023 as purchasers’ inventory levels from previous stockpiling activities dialed down and exit of new entrants from recent years.

• Although the softening raw material prices in recent times are a boon for glovemakers, this may be capped by the rising labour costs as well as revision in natural gas tariff by 25.0%. Meanwhile, HARTA is also exploring for opportunities for M&A activities such as potentially expanding manufacturing production into overseas and strengthen the distributing business segment.

Valuation & Recommendation

• We slashed our earnings forecast by 45.3% and 25.8% to RM99.5m and RM171.6m for FY23f and FY24f respectively, adjusting to the weaker plant utilisation rate and further normalisation of ASP. We maintained our SELL recommendation on HARTA with a lower target price of RM1.26.

• Our target price is derived by ascribing a PER of 25.0x to their FY24f EPS of 5.0 sen. The ascribed targeted PER represents -0.5 SD against 5-year historical mean average.

• 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 - 8 Feb 2023