Summary

• Hartalega Holdings Bhd’s (HARTA) 1QFY24 net loss stood at -RM52.5m vs. a net profit of RM88.3m recorded in the previous corresponding quarter, owing to the lower sales volume, normalising of average selling price (ASP) and one-off provision amounting to RM47.0m for the severance pay due to the decommissioning of Bestari Jaya plant. Revenue for the quarter decreased 48.0% YoY to RM515.7m.

• Core net loss at -RM5.5m fell short of our expected core net profit of RM87.3m and of consensus expectations of RM158.0m. Still, we reckon that recovery will be on the cards moving into subsequent quarters following the inventory de-stocking activities from major purchases. Meanwhile, balance sheet remains fairly strong, equipped with a net cash position of RM1.53bn.

• After booking the recent impairment, we understand that the FY24f bottomline will continue to be impacted by c.RM23.0m of balance impairment for the severance package of employees at Bestari Jaya plant.

• During the quarter, we gather that average plant utilisation rate fell to 40.6% vs 53.6% recorded in 4QFY23, impacted by the softer demand. Looking ahead, we reckon that the utilisation rate may hover around current levels over the foreseeable future. Nevertheless, HARTA remain committed in the 5-year strategic plan that entails operational rationalisation and production efficiency.

• The decommissioning of Bestari Jaya plant will (i) ensure cost saving from energy, (ii) lower annual capex maintenance and (iii) the consolidation of operations into NGC in bid to improve competitive lead and business resilience. Hence, we are in favour of the operational rationalisation and production efficiency plan.

• We gather that the gloves industry is now on the capacity rationalisation phase. Major glove players have either deferred or stopped their expansion plans. This will allow excess capacity to be gradually absorbed in the market (which we reckon may take a period of time) before achieving a breakeven level.

• Blended ASP declined -3.5% QoQ in 4QFY23 as the overcapacity in the gloves industry is still at large. We expect that the revision of ASP may remain a distance until the excess capacity emerged in recent years be absorbed in the market. Hence, we maintain our stance that the overcapacity situation may only turn favourable towards end-2024/early-2025.

Valuation & Recommendation

• We made no changes to our earnings forecast, given that ASP has now turned stable over the past 3 quarters and the group may likely to return to the black in subsequent quarters. Therefore, we re-iterate our HOLD recommendation on HARTA with an unchanged target price of RM2.05.

• Our target price is derived by ascribing a 1.5x to their FY24f BV of RM1.36. The ascribed targeted price to book is in line with 1-year historical mean average.

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

Source: Mplus Research - 10 Aug 2023