• Upgraded to HOLD (TP: 2.08) Hartalega’s 1HFY24 core PATAMI of RM22.2mn was below our in-house (14.3%) but above street estimates (65.5%). The lower-than-expected earnings were due to lower sales volume and average selling price (ASP), despite lower input costs. Hartalega’s 3QFY23 revenue increased 2.7% QoQ, reaching RM33.4mn, thanks to a turnaround in PBT. This was driven by higher sales volume (+9% QoQ) and improved margin (+17ppts QoQ). We cut lower our FY24-FY25F earnings forecast by 62%/30% to RM58.8mn/RM141.2mn respectively. We expect no further loss in Hartalega's earnings, anticipating improved sales volume and strong operating margins. While demand is likely to stay subdued, consistent order replenishment can enhance the group's performance, supported by a sustainable cost structure after decommissioning the Bestari Jaya facilities. Upgraded to a HOLD call for Hartalega from SELL with a higher TP of RM2.08 (RM1.52 previously). Our valuation is now pegged at Hartalega’s 3-years preCovid historical forward PE of 27x to CY25F of 7.7sen.

• Key Highlight. In 2QFY24, management reported a 4% QoQ decrease in ASP despite a 7% QoQ increase in sales volume. Operating margins improved due to lower input costs, especially for raw materials and natural gas. The Group anticipates the impact of the recent natural gas price hike to become evident only in 1HCY25, and the Bestari Jaya facility decommissioning should be completed by 1QCY24.

• Earnings revision. We cut lower our FY24-FY25F earnings assumption by 52- 62% to RM58.8mn/RM141.2mn respectively to account for lower ASP.

• Outlook. The group anticipates a decline in ASP due to price competition but foresees a modest increase in sales volume as customers replenish orders. Overall, we believe that Hartalega’s period of earnings loss is over, with the anticipation of improved sales volume and a commendable operating margin. However, demand is expected to remain bleak at the current level. Nonetheless, small and consistent order replenishment has the potential to boost the group's performance, along with a sustainable cost structure following the decommissioning of the Bestari Jaya facilities. The decommissioning of the production facility is expected to help reduce industry oversupply, moving the market closer to normalization.

Source: BIMB Securities Research - 8 Nov 2023