Hartalega reported a net profit of RM22.4m (-19.2% QoQ) in 3QFY24, mainly due to a 3% QoQ drop in sales volume affected by the Red Sea crisis, causing delays in shipments. After stripping out non-operating items and a total of RM20m one-off reversal severance provision for decommissioning of Bestari Jaya (BB) facility, Hartalega recorded a small core net loss of RM0.034m in 3QFY24, compared to a core net profit of RM25.5m in 2QFY24. Results were below both our and market expectations at 41% and 55% respectively. The discrepancy in our forecast was mainly due to the lower-than-expected sales volume. We cut our FY24-25F earnings by 3%-35% to factor in a lower ASPs and sales volume. We believe the current share price has outpaced its fair valuation, and as we do not anticipate any positive earnings surprises in the medium term, we therefore downgrade our call on Hartalega from Neutral to Underperform, with a lower TP of RM2.07, based on 1.5x CY24F BVPS (near its 1-year historical mean).

• Revenue declined QoQ due to lower sales volume. Hartalega’s 3QFY24 revenue declined by 8.1% QoQ to RM415.6m, mainly due to a 3% QoQ drop in sales volume. Utilisation rate has dropped to 43% in 3QFY24 from 44% in 2QFY24, mainly attributed to the decommissioning of BB facility as current new orders are shifted to NGC 1.0. Hartalega has lowered its ASPs by 5% QoQ, attempting to regain some market share. We gathered that China players are still selling at discount (c.USD14-16/1k pieces), while enjoying better margins on decreasing coal price. We expect the ASPs to remain flat going forward mainly due to intense competition from China.

• Lower core net profit due to higher operating costs. After stripping off the non-operating items and a total of RM20m one-off reversal severance provision for decommissioning Bestari Jaya (BB) facility, Hartalega reported a core net loss of RM0.034m in 3QFY24, compared to a core net profit of RM25.5m in 2QFY24. The weaker sets of results were mainly due to a 10-15% rise in raw material prices. In tandem with lower revenue, Hartalega normalized PBT margin (stripping off RM20m provision cost in 3QFY24) dropped to 1.59% in 3QFY24 from 7.37% in 2QFY24.

• Outlook. The outlook for Malaysian gloves industry appears bleak as we anticipate ASP to remain stagnant due to customers’ reluctance in absorbing additional costs amid stiff pricing competition from Chinese gloves manufacturers. Though recent demand has displayed some signs of improvement, the expected normalization of the USD/MYR exchange rate, combined with escalating operating expenses, particularly in natural gas and raw material prices, would suggest further challenges to the operating landscape.

Source: PublicInvest Research - 7 Feb 2024