Hartalega’s 2QFY22 core PATAMI of RM905.6m (-60% QoQ, +65% YoY) brought 1HFY22 core PATAMI to a sum of RM3,147m (+312% YoY). We deem its performance largely in line with our forecasts, despite accounting for 81% and 82% of ours and street projections, as we are anticipating weaker quarters ahead, given the falling ASPs. We lower our earnings estimates for FY22/23/24f by 7%/7%/10%, as we take into the account the lower utilization rate, as well as rising production cost. Our TP is subsequently lowered to RM6.10, implying a PE multiple of 12x (slightly above the rubber glove sectors’ 3-year mean of 11x) on its CY22f EPS of 50.8 sen. Reiterate HOLD on Hartalega.

Largely within expectations. 2QFY22 core PATAMI of RM905.6m (-60% QoQ, +65% YoY) brought 1HFY22 core PATAMI to RM3,147m (+312% YoY). We deem the results to be broadly within our estimates despite accounting for 81% and 82% of our and consensus estimates, as we are projecting sequentially weaker quarters, given falling ASPs. Core PATAMI was arrived at after adjusting for forex and fair value gains amounting to RM906k.

Dividends. Declared Dividend of 35.2 Sen Per Share, Going Ex on 17th November. (2QFY21: 3.85 Sen)

QoQ. The decline in ASP (-27% QoQ) and lower sales volume (-34% QoQ) have resulted in revenue falling by 49% QoQ. The drop in sales volume was mainly attributable to the imposition of Enhanced Movement Control Order (EMCO) in July 2021, leading to a closure in its plants and subsequently operating with only 60% workforce under the National Recovery Plan (NRP). Core PATAMI declined by 60% QoQ, as the decline in ASPs were steeper than the decline in raw material prices, causing a margin contraction.

YoY. Revenue grew by 49% YoY, mainly due to an increase in ASP (+114% YoY), partially neutralizing the effects of lower sales volume (-30% YoY). Lower sales volume was due to the same reason mentioned above. In tandem with the growing revenue, core PATAMI was also 65% higher YoY.

YTD. Revenue growth of 161% YoY was fuelled by an increase in ASP, despite sales volume declining c.10% YoY. Core PATAMI was up by 312% YoY, on the back of margin expansion as the higher ASP was sufficient to account for the increase in raw material costs.

Outlook. Management expects ASP for the coming quarters to hover around current levels of USD30-35 per thousand pieces. The higher social compliance, energy and labour cost will keep ASPs elevated compared to pre-pandemic and for ASPs to sustain above pre-pandemic levels, concerted effort from all manufacturers are required, so as to not flood the market with excess supplies, exerting downward pressure on pricing. Given the weaker demand (due to buyers adjusting inventories) and labour constraint, utilization rate in the coming months should also stay below 75%.

Forecast. We lower our earnings forecasts for FY22/23/24f by 7%/7%/10%, as we factor in the lower utilization rate and higher cost of sales.

Maintain HOLD, TP: RM6.10. Following our earnings adjustment, our TP is lowered to RM6.10, valued at a PE multiple of 12x (slightly above the rubber glove sector’s 3- year mean of 11x) on its CY22f EPS of 50.8 sen. We maintain our HOLD rating on Hartalega.

Source: Hong Leong Investment Bank Research - 3 Nov 2021