Hartalega reported a net profit of RM8.6m in 2QFY25, a 73% QoQ drop from RM31.9m in 1QFY25, primarily due to a weaker USD against MYR and higher raw material costs. After adjusting for non-operating items, Hartalega's core net profit stood at RM30.4m in 2QFY25, down 17.3% QoQ from RM36.7m in 1QFY25. The results were below streets' estimates at 40.8% while exceeded our projections at 58.7%. The discrepancy in our forecasts was mainly due to a higher-than-anticipated increase in sales volume. We raise our FY25F earnings forecast by 13% to account for higher sales volume, while maintaining our FY26F-27F earnings projections. All told, we reiterate our Outperform call on Hartalega, with a higher TP of RM3.65 based on 2.7x PBR, which is near +2SD (previously +1SD) at 1-year historical mean, as we are positive on the higher inflow of sales volume from the US customers given the increase in tariff imposed in Jan 2025. On a side note, Hartalega declared a first interim single tier dividend of 0.56 sen per share.

• Revenue. Hartalega's 2QFY25 revenue increased by 11.7% QoQ mainly due to a 16% QoQ increase in sales volume to 6.8bn pcs. This was due to the inflow of orders as Chinese manufacturers are currently operating at full capacity. Hartalega is expected to reach 2.3-2.4bn monthly sales volume in Dec 2025 (from 2.1-2.2bn monthly sales previously), driven by the shift in US orders to Malaysian manufacturers amidst tariff hike faced by Chinese players. Utilisation rate has improved to 90% in 2QFY25, up from 78% in 1QFY25. As USD/MYR weakening trend moderated coupled with higher sales volume going forward, Hartalega's blended ASPs is expected to improve by USD1-2/1k pcs in 2HFY25.
• Net profit. After stripping off the non-operating items, Hartalega reported a core net profit of RM30.4m in 2QFY25, down 17.3% QoQ from RM36.7m in 1QFY25. Hartalega reported a loss before tax of RM47.5m in 2QFY25, from a PBT of RM41.1m in 1QFY25, mainly due to a weaker USD against MYR, and increased raw material costs. We anticipate raw material prices to normalize in 2HFY25, which should sustain and improve operating margins.
• Outlook. We maintain a positive outlook on Hartalega, supported by sequential improvements in sales volume as customers continue to replenish depleting inventories. The Group is on track to expand its production capacity from 32bn to 37bn gloves annually by the end of FY25, targeting to achieve a utilisation rate of 75-85% with the commissioning of NGC1.5. Additionally, the recent announcement of higher tariffs on glove imports from China by the US Trade Representative, effective Jan 2025, could provide a further boost for Malaysian manufacturers, positioning Malaysian manufacturers to regain market share in the US market.

Source: PublicInvest Research - 13 Nov 2024