Hartalega reported a net profit of RM15.1m (-32.5% QoQ) in 4QFY24, mainly due to a higher operating cost, i.e. raw material prices and production costs. After stripping out non-operating items and RM19m expected credit recovery on asset upon liquidation of a foreign subsidiary, Hartalega recorded a small core net loss of RM1.5m in 4QFY24, compared to a core net loss of RM0.034m in 3QFY24. For cumulative FY24, core profit came in at RM25.5m, which were below both our and market expectations at 60% and 52% of fullyear forecasts respectively. The discrepancy in our forecast was mainly due to lower-than-expected ASPs. We maintain our FY24-25F earnings as we expect sales volume to return while ASPs to remain stagnant going forward given Chinese player’s competitive pricing. We reiterate our Underperform call on Hartalega, with an unchanged TP of RM2.07, based on 1.5x CY24F BVPS (near its 1-year historical mean).

• Revenue increased QoQ attributable to higher sales volume. Hartalega’s 4QFY24 revenue increased by 27.5% QoQ to RM529.8m, mainly due to a 24% QoQ increase in sales volume. Utilisation rate increased to 73% based on a capacity of 82bn pcs/annual in 4QFY24, compared to 43% in 3QFY24 based on a capacity of 120bn pcs/annual. ASPs has improved 2.2% QoQ to c.USD21/1k pcs in 4QFY24. We gather that China players were still selling at discount (c.USD17-18/1k pcs).

• Lower core net profit due to higher operating costs. After stripping off the non-operating items, Hartalega reported a core net loss of RM1.5m in 4QFY24, compared to a core net loss of RM0.034m in 3QFY24. Despite revenue improved QoQ, Hartalega’s PBT declined 35% QoQ to RM18.9m, mainly due to a c.10% QoQ rise in raw material prices, coupled with higher operating costs following the ramp up in production activities. Hartalega’s normalized PBT margin (stripping off RM19m one-off expected credit recovery on asset liquidation) dropped to 0.4% in 4QFY24 from 1.6% in 3QFY24.

• Outlook. The US Government has announced a tariff increase on the import of China’s medical gloves from 7.5% to 25% effective in 2026. This development is expected to narrow the pricing gap between Malaysian and Chinese glove players, enhancing the competitiveness of Malaysian players and enabling them to gain a larger market share. However, we believe the near-term outlook remains challenging due to the sector's adjustment to global oversupply. Additionally, the anticipated normalization of the USD/MYR exchange rate and rising operating expenses, particularly for natural gas and raw materials, suggest further difficulties for the industry's operating environment despite recent signs of improved demand.

Source: PublicInvest Research - 23 May 2024