KUALA LUMPUR (Nov 13): BIMB Securities has downgraded Hartalega Holdings Bhd (KL:HARTA) to a “sell” call, from a “hold”, after a share price rally.

In a note on Wednesday, the research firm said that the current valuation is overstretched, given the challenging industry dynamics.

“Due to recent rally in share price, we downgrade our call to a ‘sell’ call, from ‘hold’, but with a higher TP (target price) of RM2.90 (RM2.60 previously), as we rolled over our valuation to FY2027F,” it said. Hartalega has gained nearly 22% year-to-date, according to Bloomberg data.

The house noted that Hartalega’s 1HFY2025 core net profit of RM73.8 million came within internal (53.5% of in-house) estimates, but fell short of consensus expectations, achieving only 44.9% of the market’s projection.

BIMB also cited challenges to the glove sector’s recovery.

“The overall recovery of the rubber glove industry to pre-Covid levels remains constrained by structural issues and oversupply from Chinese manufacturers,” BIMB said.

BIMB bases its lower TP on a forward price-to-earnings (PE) of 27 times, pegged to FY2027 earnings, on the back of a cautious long-term view, given ongoing market oversupply.

The house noted that although Hartalega saw higher sales volumes from restocking activities, these gains do not suggest a lasting recovery in demand.

Currently, the stock has twelve “buy” calls, six “holds” and three “sell” calls.

In an exchange filing on Tuesday (Nov 12), Hartalega said itss net profit fell 69% in the second quarter, as export revenue declined with the rising ringgit, while raw material costs surged.

Net profit for the three months ended Sept 30, 2024 (2QFY2025) was RM8.63 million, Hartalega said. The company would have made a pre-tax loss of RM47.45 million, without deferred tax income from incentives for capital investments for its domestic expansion.

Similarly, MIDF Research kept its “neutral” call on the stock, but raised its TP to RM3.29 (from RM2.62), noting the recognition of a significant deferred tax asset, amounting to RM56.1 million.

MIDF noted rising raw material and labour costs, which continue to impact margins, despite an anticipated improvement in sales volumes, moving into 2HFY2025.

“There could also be a potential increase in labour costs due to the implementation of minimum wages, which could also lead to a revamp in salary structure,” MIDF added.

On valuation, MIDF assigned a higher PE multiple of 41.9 times, anticipating operational efficiencies from Hartalega’s new production lines at NGC1.5, which could boost profitability.

At time of writing on Wednesday, Hartalega’s share price was down three sen or 0.90% at RM3.29, valuing the company at RM11.28 billion.