Hartalega to decommission Bestari Jaya plant, likely giving rise to RM347m impairment

KUALA LUMPUR (May 8): Hartalega Holdings Bhd is decommissioning its Bestari Jaya production facility, taking off four production plants with 40 production lines from its capacity by year end.

The decommissioning exercise, which the group described as a “difficult yet necessary” decision to weather the current tough market landscape, is expected to give rise to an impairment loss of RM347 million for the financial year ended March 31, 2023 (FY2023).

The glove maker, one of the largest in the country, said in a stock exchange filing on Monday (May 8) that further provision for retrenchment costs and contract obligation expenses amounting to about RM70 million is expected for FY2024.

“Throughout this exercise, the company is committed to treating its employees fairly and with respect,” it said.

Hartalega said it had put in place measures to support affected employees during the decommissioning exercise, which is expected to take about six months.

These measures include opportunities for redeployment to the group’s Next Generation Integrated Glove Manufacturing Complex (NGC) facility in Sepang for relevant roles, “competitive” severance packages, outplacement support, a specialised help desk for queries, and counselling for affected employees.

“Given the competitive business environment, the company is of the view that it is more strategic and viable in the long term to consolidate operations at the NGC facility,” it said.

“Compared with the state-of-the-art production lines at the NGC facility, the Bestari Jaya facility is less efficient and restricted by older technology, as well as generating higher energy and labour costs, in addition to higher maintenance costs due to the age of the facility.

“Hence, once the decommissioning is completed, the company expects a reduction in operating cost and depreciation, which will have a direct benefit on its bottom line,” it added.

Taking a longer-term view, the NGC facility also has the capacity for future expansion, as it continues to progress strategically in line with prevailing market supply and demand dynamics, according to Hartalega.

In a statement on Monday, Hartalega chief executive officer Kuan Mun Leong said the decommissioning is part of the management’s operational rationalisation efforts.

“Given the challenging market conditions, we have put in place a five-year strategic plan to reinforce business resilience and long-term sustainability.

“Ultimately, this will lay the groundwork to enhance cost optimisation and strengthen operational efficiencies, leveraging the higher line speed and technological advancements at our NGC facility,” he said.

According to Citi Research, Bestari Jaya facility accounts for 30% of Hartalega's overall capacity.

"The move to decommission a sizeable portion of its capacity suggests that Hartalega does not see demand picking up in a big way in the near-term," said Citi Research, noting that the chunky impairment charge will also weigh on the group's fourth quarter earnings.

However, Citi Research commented that the exercise makes sense and is timely amid the challenging operating landscape. "In the medium to long run, a supply-side rationalization is also key for the current demand-supply imbalance to reverse."

Job cutting may be idiosyncratic to Hartalega

Although the glove sector is enduring various challenges from softening demand to margin squeeze, it appears jobs cutting may be idiosyncratic to Hartalega in the industry.

Supermax Corp Bhd’s executive chairman Datuk Seri Stanley Thai said while the group is also decommissioning less efficient production plants, it is on an “aggressive” recruitment drive to expand newer and bigger manufacturing facilities in Klang, Selangor.

“Decommissioning older and less efficient production plants is the smart thing to do for all glove manufacturers at this juncture,” he told The Edge when contacted.

“Supermax is doing the same of decommissioning old plants and consolidating into a large manufacturing campus in Meru, Klang, where we have built six blocks of manufacturing facilities during the pandemic (2020-2022).

“While we shut older plants, we redeployed the workers to the new plants. Thus, there are no workers required to be laid off. In fact, we are going through an aggressive recruitment drive to expand our manufacturing and technical teams, recruiting and preparing the US team to commission the US plant,” Thai added.

Kossan Rubber Industries Bhd’s group managing director Tan Sri Lim Kuang Sia, meanwhile, told The Edge that the group has no plan to decommission any of its production capacity for the time being.

“[We] have no plan [to decommission any capacity] yet,” he said in a text message.

Top Glove Corp Bhd’s management has not responded to requests for comments at press time.

Shares in Hartalega fell as much as 8.1% to an intraday low of RM1.81 on Monday after announcing its decommissioning plan, before paring some losses to close at RM1.87, still down 10 sen or 5.1%, giving the group a market capitalisation of RM6.41 billion.