Hartalega’s 3QFY22 core PATAMI of RM263.5m (-71% QoQ, -75% YoY) brought 9MFY22 core PATAMI to a total of RM3,411m (+88% YoY). Although the results have accounted for 94% and 97% of our and consensus projections, we still deem the performance within our forecasts (recall that Hartalega achieved supernormal profits in 1HFY22 as ASPs hit an all-time high in 1QFY22. The ASP has since peaked and began to taper off), as we are expecting a weaker 4Q, given the falling ASPs. We keep our FY22f forecasts unchanged, but we lower our FY23-24f earnings projections by 10-36% to account for lower ASP and higher cost of production. TP is subsequently lowered to RM5.05, valued at 12x CY22 PE (at slightly above the glove sectors’ 3-year mean). Maintain HOLD.

Broadly in line. 3QFY22 core PATAMI of RM263.5m (-71% QoQ, -75% YoY) brought 9MFY22 core PATAMI to a total of RM3,411m (+88% YoY). While the results have accounted for 94% and 96% of our and consensus forecasts respectively, we still deem the results to be broadly within our expectations as we are anticipating a weaker 4Q, on the back of falling ASPs. Core PATAMI was arrived at after adjusting for forex and fair value gains amounting to RM264k.

Dividends. Declared dividend of 14.8 sen per share, going ex on 22 Feb. (3QFY21: 9.65 sen)

QoQ. With ASPs tapering off (-44% QoQ) and the falling sales volume (-17% QoQ), Hartalega’s revenue suffered a 50% decline. The drop in sales volume was a result of heightened competition and glove buyers continuously adjusting inventories level to avoid locking in supplies at elevated prices. Utilisation rate for the quarter declined to an all-time low of 52% (2QFY22: 63%) as c.1bn pcs of gloves were unable to be shipped out due to vessel shortages. Also, margins continued to come under pressure, since the decline in raw material price was unable to compensate for the steep drop in ASP, as the significant decline in nitrile butadiene prices only materialised in December. Core PATAMI declined 71% QoQ as a result.

YoY. Revenue fell 53% YoY on the back of falling ASPs (-19% YoY) and declining sales volume (-42% YoY). The weaker sales volume was due to the same reasons mentioned above. In line with the falling revenue, core PATAMI also declined by 75% YoY.

YTD. Revenue growth of 57% YoY was supported by strong ASPs which reached an all-time high in 1QFY22, fuelling supernormal profits and margin expansion. As a result of that, core PATAMI for 9MFY22 grew significantly by 88% YoY.

Outlook. ASPs are expected to continue trending lower and management expects the ASP for 4QFY22 to be at c.USD28 level. Margins should also continue to narrow, given the inflationary pressures (i.e. higher energy and labour costs), and could potentially dip below that of pre-Covid levels. As for its expansion plans, commissioning of NGC 1.5 has been delayed to October 2022 (earlier target: April 2022) and the commissioning of NGC 2.0 will only begin after NGC 1.5 is fully operational.

Forecast. We keep our FY22 forecasts unchanged, but we lower our projections for FY23-24f by 10-36%, as we impute lower ASP and higher cost of sales in our forecasts.

Maintain HOLD, TP: RM5.05. Following our earnings adjustment, our TP is lowered to RM5.05, valued at a PE multiple of 12x (slightly above the rubber glove sector’s 3- year mean of 11x) on its CY22f EPS of 42.1 sen. Maintain HOLD on Hartalega.

Source: Hong Leong Investment Bank Research - 9 Feb 2022