Hartalega recorded the first-ever quarterly net loss of RM197.9m in 4QFY22 as it was hit by Cukai Makmur. Meanwhile, FY22 net profit grew by 12.1% YoY to RM3.2bn, predominantly due to higher average selling prices (ASP) in 1HFY22. The results came in within both our and consensus estimates at 97% and 98% of full-year numbers respectively. However, we expect a weaker performance in FY23F, as inflationary pressure would lead to higher raw material costs. Therefore, we lower our forecasts for FY23-24F by 10-26% to factor in higher cost. However, as Hartalega’s long-term prospect remains positive, we maintain Neutral call with a revised TP of RM4.92 based on a PE of 26x (at its pre-Covid 5-year historical mean) CY23F EPS of 18.9sen. On a side note, Hartalega declared the third interim dividend amount to 3.5sen per share.

• 4QFY22 revenue. Hartalega’s 4QFY22 revenue declined by 3.7% QoQ mainly due to a decline in ASP (-28% QoQ), attributed to a surge in global glove supplies. This was partly offset by an increase in sales volume (+33% QoQ). We reckon that the increase in sales volume was partly due to the clearing of backlog order in 3QFY22 (approximately 1bn pieces were held up in the port in 3QFY22). However, management is of the view that the supply chain issue will still persist in the coming quarters due to Shanghai lockdown. Utilisation rate has increased from 52% in 3QFY22 to 69% in the current quarter. NGC1.5 (plant 8-11) with a capacity of 19bn pieces pa is targeted to commence its first line in 4QCY22.

• Net loss in 4QFY22. Hartalega recorded a net loss of RM197.9m in 4QFY22. The loss was mainly cause by the provision of Cukai Makmur, which amounted to c.RM400m. As we strip out the impact of a one-off Cukai Makmur, 4QFY22’s core net profit was down 22% QoQ to RM202.1m. The decline was mainly due to the lower ASP, which was partly offset by the decrease in raw material price. PBT margin dropped from 35.0% in 3QFY22 to 22.5% as the rate of decline in raw material price was slower than the rate of decline in ASP.

• Outlook. Management guided that the reopening of international borders should help to relieve the labour shortage issue. Besides that, ASP is expected to increase in June delivery to take into account the inflationary pressure. However, due to the strong competition in the industry, Hartalega might not able to fully pass on the cost to the buyer. Despite near-term headwinds, the long-term outlook remains positive as glove consumption in the emerging markets is expected to increase notably, supported by the low per capita consumption, amid heightened hygiene awareness.

Source: PublicInvest Research - 11 May 2022