• Overview. Hartalega Holdings Berhad (Hartalega) 2QFY23 PATAMI declined by  67.9% QoQ and 96.9% YoY, no thanks higher operating costs as a result of lower  utilisation rate. This is consistent with disappointing revenue which tanked by 30.9% QoQ and 70.9% YoY to RM584mn following lower average selling price  (ASP) and weak sales volume. As for 1HFY23, revenue that tumbled by 75.8%  YoY was hit by normalised ASP and a decrease in sales volume (-27% YoY) due  to stiff market competition. Meanwhile Hartalega bottom line that declined by 96.3% YoY, was further dragged by higher energy and labour costs.

• Key highlights. Utilisation rate continued down trend, running at 49% during  2Q23 compared to 66% during the previous quarter amid declining sales  volume (-30% QoQ). We understand that ASP has been hovering around  USD20/k pcs and management expects to maintain this moving forward. PBT  margin also declined or by 9.5ppts QoQ as Hartalaga was compelled to absorb  the rising operation costs in view of oversupply situation. Other than that, the  commencement of new lines of NGC1.5 which was initially set to take place at  the end of this year has been put on hold until certain period given the  impending improvement in supply-demand dynamics.

• Against estimates: Below. 1HFY23 net profit of RM116.6mn was below ours and consensus estimates which accounted only 31.8% and 36.7% of full year  estimates respectively.

• Outlook. Looking forward, Hartalega’s tough operating environment is  expected to prevail in FY23 amid rising input costs and persistent supply and  demand imbalance where this may hurt ASP as well as utilisation rate and by  extension, their expansion plan. This could be a dampener to bottomline apart  from rising operating costs, especially natural gas price and labour cost and  therefore, its margin. Note that natural gas price has surged 24.7% QoQ during  2QFY23.

• Earnings revision. We cut our FY23F and FY24F earnings forecast by 48% and  38.9% after factoring in 1) a lower ASP 2) lower sales volume and 3) margin compression.

• Our call. Maintain a SELL call Hartalega with a lower target price of RM1.70 (RM2.46 previously) following earnings downgrade. Our valuation is now  pegged at 21.8x (15% discount to Hartalega’s 5-years average forward PE) to  FY24F of 7.8sen.

Source: BIMB Securities Research - 9 Nov 2022