Hartalega reported a net profit of RM27.7m in 2QFY24 (+152.8% QoQ), mainly due to an 8% QoQ increase in sales volume. After stripping out nonoperating items, Hartalega’s core net profit jumped to RM25.5m in 2QFY24, from RM1.5m in 1QFY24. Results were above street’s estimates at 79.8% and our estimates as we forecasted a net loss for full-year FY24F. The discrepancy in our forecast was mainly due to a higher-than-expected sales volume. We raise our FY24 forecast from a net loss of RM35.9m to a core net profit of RM65.5m, as we expect Hartalega to record higher sales volume in 2HFY24, underpinned by customers’ low inventory levels. All told, we upgrade our call on Hartalega from Underperform to Neutral, with a higher TP of RM2.11 based on 1.6x CY24F BVPS (from 1.3x previously), which is near its 1-year historical mean.

• Revenue improved QoQ due to higher sales volume. Hartalega’s 2QFY24 revenue increased 2.7% QoQ to RM452.1m, mainly due to an 8% QoQ rise in sales volume. Utilisation rate has improved to 44% in 2QFY24 from 41% in 1QFY24, mainly attributed to the decommissioning of Bestari Jaya facility as current new orders are shifted to NGC 1.0. We gather that China is still selling at discount (~USD14-16/1k pieces), while enjoying better margins on decreasing coal price. Hartalega has lowered its ASPs by 5% QoQ, attempting to regain some market share. We believe Hartalega will be able to secure more orders in 2HFY24, given the low inventory levels of its key customers, but we expect orders to flow in gradually as customers are still able to receive orders in a short lead time due to the low utilisation rate across the industry.

• Higher core net profit due to lower operating costs. After stripping off the non-operating items, core net profit jumped to RM25.5m in 2QFY24 from RM1.5m in 1QFY24. The stronger sets of result were mainly due to a c.15% QoQ drop in raw material prices while labour cost remained flat. Notably, Hartalega’s normalised PBT margin (stripping off RM47m provision cost in 1QFY24) improved QoQ from 0.5% to 8.0% in 2QFY24.

• Outlook. We believe Hartalega will secure higher orders and sales volume in 2HFY24, given customers’ low inventory levels. However, ASPs are expected to drop as customers are still not willing to absorb any incremental cost given the prevailing pricing competition from Chinese gloves players. Nevertheless, we believe the lower raw material prices and the strengthening of USD would be favourable to Hartalega. Alongside with capacity rationalizing, utilisation rate is expected to improve on better operational efficiency. All told, we upgrade our call on Hartalega to Neutral.

Source: PublicInvest Research - 8 Nov 2023

Source: PublicInvest Research - 8 Nov 2023