Hartalega recorded a net loss of RM302.8m in 4QFY23, down 53% YoY due to a decommissioning expense of its Bestari Jaya (BB) facility amounting to RM347m. For FY23, Hartalega’s core net profit declined 96% YoY to RM139.8m (after stripping off the non-operating items). The results were above both our and consensus estimates. Owing to excess inventory level and competition from Chinese producers, Hartalega’s attempt to raise ASP was not entirely successful as it received pushbacks from customers. We downgrade our call on Hartalega to Underperform, given the 20% spike in share price over the past 1 week, and maintain our FY24-25F core earnings forecast (-1%/-2% differences due to book-keeping changes), with an unchanged TP of RM1.69 based on 27x CY24F EPS (at its 5-year historical mean).

• Revenue. Hartalega’s 4QFY23 revenue increased 11.7% QoQ to RM515.7m and reported a higher utilization rate of 54% in 4QFY23 (3QFY23: 44%), mainly due to the contribution from the non-medical customers ie. food industry following the festive season. However, we believe this trend is not sustainable as the increase in demand from the non-medical segment was largely due to seasonality. FY23 revenue dropped 70% YoY to RM7,888.3m, due to a lower sales volume and ASP while utilization rate was running at average of 54% in FY23, declined from 68% in FY22 as oversupply in gloves persists. ASP is expected to stay flat at ~USD20/1k pieces.

• Net loss due to decommissioning of Bestari Jaya. Hartalega recorded a net loss of RM302.8m in 4QFY23 from a net loss RM31.2m in 3QFY23. Core net profit for FY23 dropped 96% YoY to RM139.8m (after stripping off the expense of BB facility and other non-operating items). We note that natural gas prices have been trending down c.14- 15% in 4QFY23, while the raw material prices remained flat. However, the one-off retrenchment cost from BB facility of c.RM70m will be reflected progressively in FY24, but will be offset by an estimated reduction of c.RM28-40m depreciation cost. Hence, we expect the overall cost to remain flattish in FY24.

• Outlook. Moving into FY24, we expect operating environment to remain challenging given weak global demand caused by excess capacity condition in the market. Hartalega’s move in shaving ~30% of its production capacity would be beneficial in the near term, in terms of lowering cost and improving production efficiency. However, as long as its competitors in China are not raising ASP meaningfully, we believe any attempt by Malaysian gloves players will lead to resistance from customers.

Source: PublicInvest Research - 10 May 2023