Hartalega to face massive industry oversupply even after 4Q turnaround, say analysts

KUALA LUMPUR (May 23): Hartalega Holdings Bhd (KL:HARTA) may continue to grapple with massive industry oversupply that will limit earnings upside and further gains in its share price, analysts cautioned, even after the world’s second-largest glove maker by volume reported better-than-expected results.

Kenanga Research, which anticipates Hartalega's operating environment to "remain challenging in subsequent quarters", said the demand-supply situation will only start to head towards equilibrium in calendar year 2026 (CY2026), when there is virtually no more new capacity coming on stream.

“We project demand for gloves to rise by 30% in CY2024 to 390 billion pieces, due to a low base effect in CY2023, and resume organic growth of 15% thereafter,” said Kenanga Research.

This projection implies an excess capacity of 212 billion pieces in CY2024, indicating that low prices and depressed plant utilisation will continue to plague the industry, it noted.

Analysts are broadly bearish on Hartalega, with nine out of 22 analysts tracking the counter assigning a 'hold' rating, six rating it a 'sell', and the remaining seven recommending a 'buy'. The consensus 12-month target price (TP) stands at RM3.13.

Hartalega's share price has appreciated over 28% year-to-date, after its share price surged over 17% last week, following the US announcing a slew of major tariff hikes for a wide range of Chinese imports, including medical and surgical gloves.

At market close on Thursday, Hartalega settled at RM3.48, down 11 sen or 3.06% after 11.05 million shares changed hands, valuing the company at RM11.9 billion.

On Tuesday, Hartalega reported to Bursa Malaysia that its net profit for the three months ended March 31, 2024 (4QFY2024) totalled RM15.12 million, compared to a net loss of RM334.97 million a year earlier, thanks partly to a provision reversal that helped to bring it earnings to the black for the year.

Revenue for the quarter climbed 2.4% year-on-year to RM529.83 million, up from RM517.55 million, thanks to higher average selling prices resulting from currency movements. No dividend was declared for the quarter under review.

After stripping out the one-off severance payment of RM47 million and RM7 million in foreign exchange losses, Hartalega’s full-year core net profit for FY2024 came in at RM64 million, representing 130% of the consensus full-year estimate.

Apex Securities, which upgraded its call for the counter to 'hold', with a higher TP of RM3.72, expects Hartalega to post a sequential and gradual recovery in the upcoming quarters, as average selling price normalisation stabilises at cumulatively US$22 per 1,000 pieces.

Meanwhile, Phillip Capital noted that Hartalega plans to continue executing its five-year plan to strengthen business sustainability and resilience, involving decommissioning its Bestari Jaya plant and consolidating operations at the more efficient Next Generation Complex 1.5 in Sepang.

“We believe Hartalega's plant utilisation would average around 78%, assuming a cumulative sales volume of 2.2 billion pieces per month,” Phillip Capital added.