Overview. Hartalega’s 3QFY22 net profit dropped to RM259.1m (-71.7% qoq, -74.1% yoy). This is mainly due to the decline in both ASP (-40% qoq, - 19% yoy) and sales volume (-17% qoq, -42% yoy), attributed to increase competition coupled with logistic issues such as capacity constraints on vessels.

Key highlights. Management foresee that ASP could decline to US$25 in March 2022 from US$40 in Dec 2021 with 4QFY22 ASP expected around US$28/ 1k pcs, which is lower than our previous estimate. Utilization rate dropped to 52% in 3QFY22 mainly due to lower sales volume caused by shipments delay.

Against estimates: Below. 9MFY22 PBT of RM4.4bn was below our and consensus FY22 forecast at 89% and 87% respectively in view of further decline in ASP and lower sales volume than expected.

Dividend. Declared 2 nd interim DPS of 14.80 sen, bringing YTD DPS declared of 50 sen. We estimate total FY22 DPS of 57 sen (60% payout), translating into DY of 10%.

Outlook. Hartalega has delayed their capacity expansion due to increase in global supply on greater competition. Its Plant 7 capacity is reduced to 2.6bn (vs 2.7bn) and NGC 1.5 with 19bn capacity has been pushed back to 4Q2022 (from April 2022 commissioning). We expect Hartalega to deliver weaker 4QFY22 earnings due to fall in ASP (c.30% qoq), higher overall operating cost as well as one-off prosperity tax (RM350-400m) to be booked during this quarter. Despite near term headwinds, Hartalega longterm prospect remain positive on structural glove demand growth as well as leader in nitrile segment and technology which could sustain its long term margin compare to its peers.

Earnings revision. We revised down our FY22-24f earnings by 6-22% to factor in the delay in capacity expansion, lower volume and ASP. Note that we have factored in the prosperity tax in our FY22 forecast.

Our call. In tandem with earnings cut, our TP is reduced to RM6.00 (from RM6.60), based on PER 26x (pre-covid 5-year historical mean) pegged to CY23f EPS of 23sen. Given the limited price upside, we downgrade our call to HOLD.

Source: BIMB Securities Research - 9 Feb 2022