• Downgrade to SELL (TP: 2.08) Hartalega 9MFY24 core PATAMI of RM44.6mn was within our in-house at 75.9% but above street estimates at 90.8%. Hartalega’s 3QFY23 core PATAMI declined 12.2% QoQ to RM22.4mn in tandem with weaker revenue that declined 8.1% QoQ to RM415.6mn. The revenue decline was due to shipment constraints caused by the Red Sea crisis, disrupting key shipping routes and causing delays. No changes on FY24-FY25F earnings forecast. Hartalega is anticipated to maintain positive earnings due to market adjustment and capacity rationalisation among existing players, though recovery in demand and ASP remain lacklustre. Downgraded to a SELL call from a HOLD for Hartalega with unchanged TP of RM2.08 due to recent rally in share price. Our valuation is based on Hartalega’s 3-year pre-COVID historical forward PE of 27x to CY25F of 7.7 sen.

• Key Highlight. 3QFY23 sales volume decline 3% QoQ, due to the Red Sea crisis causing shipping disruptions and delays, alongside a 5% QoQ decline in ASP. For Bestari Jaya decommissioning update, factory buildings and machinery are fully impaired and product transfer to NGC is completed. All production lines have been successfully decommissioned with the full decommissioning exercise set to conclude by 1QCY24.

• Earnings revision. Unchanged.

• Outlook. Management observed that market adjustment is underway due to capacity rationalization among domestic players, the exit of smaller players, and marginal demand improvement. Moving forward, we expect Hartalega to sustain these positive earnings attributed to improved sales volume and commendable operating margin. While demand is expected to still remain at below pre-Covid-19 level, small and consistent order replenishment could boost the group's performance. Overall, we are positive about the rubber glove industry, anticipating that the worst is over and foreseeing signs of recovery for the industry. This optimism is based on an expected improvement in demand despite challenges on the supply side. However, from valuation perspective, we think the stock price is running ahead of fundamental. Hence, we advise investors to revisit at lower level.

Source: BIMB Securities Research - 7 Feb 2024