Summary

• Hartalega Holdings Bhd’s (HARTA) prospects remain challenging, owing to the global gloves oversupply condition following the influx of capacity from new entrants in the industry in recent years. We expect the oversupply condition to persist moving into 2024 as capacity rationalisation takes shape at present.

• We gather that the gloves industry is undergoing the capacity rationalisation phase with planned expansions halted or deferred until the situation turns favourable. At the same time, part of the capacity from of the new entrants (particularly smaller players) is also winding down, given the absence of economics of scales in their operations.

• On a brighter note, recall that HARTA managed to raise their ASP in 1QFY24 by 14.9% QoQ. This has mitigated some weakness towards the slower sales volume that fell 25.8% QoQ. Looking ahead, we expect ASP to hover at current levels until the demand-supply conditions turns more favourable. Still, we reckon that any further recovery will be gradual and measured overtime.

• We also lauded HARTA’s move to decommission the aging Bestari Jaya plant that house 40 production lines with an annual installed capacity of 13.0bn gloves/annum. In bid to navigate the challenging operating landscape. We gather that some 1,600 employees will be deployed to NGC at Sepang. The consolidation of operations slated for completion by 1Q24 is expected to generate cost savings from energy, labour and plant maintenance.

• Going forward, HARTA is embarking onto a 5-year strategic approach. Key measures include;
  ➢ Production efficiency which involves the decommissioning of the aging Bestari Jaya plant.
  ➢ Continuously adopt automation process such as auto compounding system, auto packing machine (APM) as well as digital manufacturing system (DMS).
  ➢ Energy optimisation through the implementation of advanced burner system and optimising heating temperature.
• ➢ Research and development & innovation of ecological system such as idea bank and harvesting.

• Given the near-term outlook remain clouded by the on-going oversupply condition and prospects of recovery remain a distance, we are ceasing coverage on HARTA due to reallocation of internal resources. Our last recommendation on HARTA was HOLD with a fair value at 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.

Source: Mplus Research - 17 Aug 2023