Hartalega Holdings Berhad (Hartalega) registered a core LATAMI of RM5.5mn (excluding impairment of asset of RM47mn following decommissioning of Bestari Jaya production facility) during 1QFY24 compared to core PATAMI of RM44.1mn in 4QFY23 and RM88.3mn in 1QFY23. The result came in below ours and market forecast. We foresee the imbalance supply-demand dynamic is persist due to oversupply and overstocking in the market, at least and until end of CY23. With the decommissioning of the production facility, it is expected that the oversupply dynamic within the industry will be reduced, thereby bringing closer to industry normalization. Maintain SELL on Hartalega, with lower TP of RM1.52.

• Below expectations. Hartalega’s 1QFY24 core LATAMI of RM5.5mn was below our in-house and street estimates, given lower-than-expected sales volume and average selling price (ASP).

• QoQ. Revenue decline 14.7% QoQ amid disappointing PBT margin (-86.5% QoQ), no thanks to lower sales volume which down by 25% QoQ despite achieving ASP hike during this quarter. Despite the company's efforts to increase the ASP in order to counteract the rising material costs, this strategy resulted in a decrease in sales volume as customers have various options that offer better pricing. Apart of that, the company declared provision for severance pay of RM47mn during this quarter following the Bestari Jaya decommissioning plant announced in the last quarter. Excluding this provision, the company reported a core PBT of RM2mn.

• YoY. Revenue tumbled 48% YoY while PBT margin down 26 ppts YoY. The disappointing performance was attribute to lower ASP (41% compared to 1QFY23: 69%) and sales volume (-41% YoY) arising from stiff market competition amidst oversupply situation. Besides, customers restocking activity are currently small and only put minimal order to the glove players. As inventory level in the glove industry remains relatively high as a result of stockpiling since the COVID-19 pandemic, we do not foresee any indications of inventory replenishment, which is typically less than a month.

• Outlook. The management has indicated that Hartalega is projected to bear an additional decommissioning expense of RM24mn, slated to be accounted for in the remaining FY24, classified as contractual obligation expenditures. Addition, the group anticipated that the ASP would remain steady at current level or slightly decrease moving forward, as they aimed to maintain sufficient sales volume. Overall, we foresee the imbalance supply-demand dynamic persist due to oversupply and overstocking in the market at least until end CY23. With the decommissioning of the production facility, it is expected that the oversupply dynamic within the industry will be reduced, thereby bringing about market closer to normalisation.

• Forecast. We cut lower our FY24-FY25F earnings forecast by 22.2%/19.5% YoY to RM155.3mn/RM202mn respectively to account for lower ASP.

• Maintain SELL, TP: RM1.52. Maintain a SELL call for Hartalega with a lower target price of RM1.52 (RM1.59 previously) following our earnings downgrade. Our valuation is now pegged at Hartalega’s 5-years pre-Covid historical forward PE of 25.7x to FY25F of 5.9sen (7.3 sen previously).

Source: BIMB Securities Research - 10 Aug 2023