• Overview. Hartalega’s 4QFY22’s earningsturned red to a net loss of RM197.9m against a net profit of RM259.1m and RM1.1b in 3QFY22 and 4QFY21 respectively. Disappointing earnings were dented by higher operating costs coupled with the provision of Prosperity Tax (Cukai Makmur). On the same note, revenue tumbled 3.7% qoq and 58% yoy respectively to RM968.7m, no thanks to a decline in ASP.

• Key highlights. Sales volume was improved (33% qoq and 9% yoy) given the production of backlog orders and current sales. Shipping constraints showed some improvement but still a major problem for the Group due to the current lockdown in China. Besides that, management expects ASP to slightly increase during 1QFY23F due to cost of inflation. Nevertheless, the ASP hike is expected to be minimal as the Group only able to transfer their cost to the customers at a lower rate given the stiff competition in the rubber gloves market. Moreover, the price of NBR latex is expected to increase around 7%-10% from March’21.

• Against estimates: Inline. FY22 PATAMI of RM3.2bn was within our and consensus FY22 full-year forecast which accounts for 100% and 97.6% respectively.

• Dividend. Declared 3rd interim DPS of 3.5 sen, bringing FY22 DPS of 53.5sen. This translates into 56.5% dividend pay-out ratio and 12.3% dividend yield.

• Outlook. Commencement of the first line of NGC1.5 plant is expected to take place in Oct’22. Nevertheless, the utilisation rate of the plant will be depending on the foreign workers availability as the Group now still short in number of foreign workers. Currently, they are in approval stage to get foreign workers from government. Overall, we expect outlook for Hartalega to remain challenging given ASP is expected to continue to decline on oversupply rubber glove condition. Moreover, shortage of shipping containers is expected to prolong amid current global crisis condition thus affecting overall growth prospect.

• Earnings revision. No change to our FY23F and FY24F earnings forecast.

• Our call. Maintain HOLD call with lower target price of RM4.70 (RM6.00 previously) as we assigned lower PE to Hartalega. Our valuation now pegged at 20x CY23F of 23.7 sen (pre-covid 5-years average sectors forward PE) - as we expect moving forward ASP to decline further on imbalance supply-demand condition in rubber glove industry due to aggressive production from new entrants.

Source: BIMB Securities Research - 11 May 2022