• Overview. Hartalega registered a PATAMI of RM88.3mn during 1QFY23 which was a rebound from LATAMI of RM197.9mn during 4QFY22. This was a sharp decline however from PATAMI of RM2.3bn during 1QFY22. On the same vein, revenue tumbled by 12.7% QoQ and 78.3% YoY hurt by lower average selling price (ASP) and sales volume. Hartalega’s bottom line was further dragged by higher energy and labour costs.

• Key highlights. Utilisation rate stood at 66% during 1QFY23 (versus 64% in 4QFY22) albeit a flattish sales volume; +1.0% Q-o-Q. Management highlighted that ASP for the month of June was USD24/k pcs and this is expected to decline further amid a challenging operating environment. The ASP has not reached its bottom and could ease to below USD/20k pcs going forward. Besides that, the Group also delayed the commencement of new lines of NGC1.5 until certain period of time given that it anticipates an improvement in supply-demand dynamics. The commencement of new lines of NGC1.5 was initially set to take place at the end of this year.

• Against estimates: Below. 1QFY23 net profit of RM88.3mn was below ours and consensus estimates which accounted only 12% and 15.1% of full year estimates respectively.

• Outlook. Looking forward, Hartalega’s operating environment is expected to remain tough amid rising input costs and persistent supply and demand imbalance in the industry. The management also expects the oversupply situation to prolong until end of CY23 before normalising in CY24 where this may hurt ASP as well as utilisation rate and by extension, their expansion plan. Margin could also be under pressure due to an increase in natural gas price and higher labour costs.

• Earnings revision. We tweak down our FY23F and FY24F earnings forecast by 50% and 47.4% respectively in view of lower ASP and sales volume as well as margin compression.

• Our call. Downgrade to a SELL call from a HOLD on Hartalega with a lower target price of RM2.46 (RM4.70 previously) following our earnings downgrade. Our valuation is pegged at 20x (pre-covid 5-years average sectors forward PE) to CY23F of 12.3 sen (23.7 sen previously).

Source: BIMB Securities Research - 10 Aug 2022