Hartalega’s 9MFY22 net profit grew by 94.3% YoY to RM3.5bn, predominantly due to higher sales volume and average selling prices (ASP) in 1HFY22, though this was partly offset by higher raw material cost and other operating cost. The results came in above both our and consensus estimates at 85% and 97% of full-year numbers respectively. However, we expect a weaker 4QFY22, reflecting delays in shipment due to the lack of vessel capacity. Therefore, we lower our forecasts for FY22-23F by 15- 17% on account of lower utilization rate due to supply chain disruption. Maintain Neutral call on Hartalega with a revised TP of RM5.80 based on an unchanged 26x (at its pre-Covid 5-year historical mean) CY23F EPS of 22.3sen. On a side note, Hartalega declared the second interim dividend amount to 14.8sen per share.
- Net profit was down 72% QoQ. Hartalega’s 3QFY22 revenue dropped by 50% QoQ to RM1.0bn, due to lower sales volume (-17% QoQ) and lower ASPs (-40% QoQ). Consequently, net profit declined by 72% QoQ to RM259.1m. The weaker sales volume was due to customers adjusting their inventories as well as port congestion affecting order shipments (c.1bn pieces are held up in the port). As Hartalega’s shipments werebased FOB Incoterm, no revenue can be recognized until the orders being loaded to the vessel. Utilisation rate fell from 63% in 2QFY22 to 52% in the current quarter following the backlog of orders. Adjusting for this backlog, utilisation rate would have been 62%.The drop in ASP was mainly due to demand supply imbalances where more supply entering the market while demand is moderating. As a result, net profit margin dropped from 45.4% in 2QFY22 to 25.8%. This was also exacerbated by elevated raw material cost.
- Cukai Makmur. Management is of the view that the imposition of Cukai Makmur will materially impact the group’s profit in 4QFY22. Management is expecting additional tax bill of RM350-400m in 4QFY22, which we have already accounted for in our forecast.
- Outlook. Issues pertaining to the supply chain disruption such as labour shortage and delayed shipments, are not likely to resolve anytime soon. Hence, we expect earnings to be weaker in the coming quarters. However, the long-term outlook remains rosy as glove consumption in the emerging markets is expected to increase notably, supported by the low per capita consumption, amid heightened hygiene awareness due to the pandemic.
Source: PublicInvest Research - 9 Feb 2022