Hartalega reported a third consecutive net loss of RM52.5m in 1QFY24 (+83% QoQ), mainly due to weaker sales volume. After stripping out non operating items, Hartalega recorded a RM1.5m core net profit in 1QFY24, down 96% QoQ. Results were above our estimate as we are forecasting a net loss for full-year FY24F but below consensus net profit forecast of RM223.8m. The discrepancy in our forecast was mainly due to higher-than expected sales volume. We maintain our FY24-26F forecasts, as we expect lower sales volume due to weaker demand for gloves, which should translate to slower orders from existing customers going forward. We maintain our Underperform call and TP of RM1.70 based on 1.3x (1-year historical PB multiple mean) on its CY24 BVPS.

• Revenue declined due to lower sales volume. Hartalega’s 1QFY24 revenue declined 15% QoQ to RM440m, mainly due to a 26% QoQ drop in sales volume and lower utilization rate of 41% in 1QFY24 (4QFY23: 54%). Hartalega’s attempt to pass on incremental cost to customers with ASP adjustment of c.10% QoQ to ~USD23/1k pieces has not been successful as China is still selling at discount (~USD16- 17/1k pieces). We gather that major customers are still not placing large orders given that they have yet to deplete their inventories. Hence, we believe Harta’s current ASP is not sustainable and it may be compelled to cut its selling prices in the coming quarters to recover the loss of sales volume.

• Net loss due to provision for decommissioning of Bestari Jaya. Hartalega reported a net loss of RM52.5m in 1QFY24 from a net loss of RM302.8m in 4QFY23. Core net profit dropped 96% QoQ to RM1.5m in 1QFY24 (after stripping off the non-operating items and a one-off provision for severance pay on decommissioning of Bestari Jaya totaling RM47m). The decline was mainly due to higher labour costs, while raw material prices remained flat and natural gas dropped by c.16% QoQ.

• Outlook. Moving into FY24, we believe the operating environment to remain challenging, due to the muted global demand for gloves. Hartalega’s sales volume fell as it attempted to raise ASP, suggesting that customers are still not willing to absorb any incremental cost given the prevailing pricing competition. Hence, we remain cautious on Hartalega’s near-term outlook. All told, we expect Hartalega to remain loss making and is unlikely to revert back to its pre-Covid profit levels anytime soon.

Source: PublicInvest Research - 10 Aug 2023