Hartalega’s 4QFY22 core PATAMI of RM153.3m (-42% QoQ, -86% YoY) brought full-year FY22 core PATAMI RM3.56bn (+23.9% YoY). The results came in within our but exceeded consensus estimates at 99% and 108% respectively. On its outlook, Hartalega guided that ASPs for April and May orders will decline MoM, before rebounding in June. The increase in ASP expected in June is to mainly account for the higher costs (higher raw material, labour and energy costs), and we think that it is unlikely for Hartalega to pass on the entire cost increase, given that competition in the market is still strong currently. We make no changes to our earnings forecasts, but we lower our TP to RM4.21, as we rollover our valuation year to CY23. Our TP implies a valuation of 19.8x (at -1SD of Hartalega’s 5-year pre-Covid mean), as it better represents the normalise earnings expected in CY23. Maintain HOLD.

Finishing in line. Hartalega’s 4QFY22 core PATAMI of RM153.3m (-42% QoQ, -86% YoY) brought full-year FY22 core PATAMI RM3.56bn (+23.9% YoY). The results came in within our but exceeded consensus estimates at 99% and 108% respectively. Core PATAMI was arrived at after adjusting for forex losses and Prosperity Tax impact amounting to RM351.2m (we estimate Prosperity Tax impact to be c.RM350m).

Dividends. Declared dividend of 3.5 sen per share, going ex on 25 May. (4QFY21: 17.7 sen). FY22: 53.5 sen (FY21: 51 sen)

QoQ. Revenue was down by 4%, predominantly due to normalising ASPs (-28%). The effects of falling ASP were somewhat neutralised by the higher sales volume (+33%), due to the backlog of undelivered orders previously being delivered in the current quarter. That has also resulted in utilisation rate improving to 70% (3QFY22: 52%). Despite better utilisation, EBIT margins still narrowed by 11.6 ppts, given that the drop in raw material prices were not in tandem with the decline in ASPs. All in, core PATAMI was down by 41.8%.

YoY. Normalising ASPs (-61%) resulted in revenue falling by 58%, despite sales volume coming in stronger by 9%. Better sales volume was due to low base effect, as Hartalega shut down some of its production lines temporarily in 4QFY21 to contain the spread of Covid-19. In line with the weaker revenue, core PATAMI was 86% lower.

YTD. Revenue growth of 18% was achieved on the back of higher ASPs (+39%), despite volumes declining by 15%. EBIT margins remained largely flat, as the increase in ASP was partially offset by the higher operating costs. In tandem with the growing revenue, core PATAMI was 24% higher.

Outlook. We gathered that ASPs in 4Q22 has averaged out to be c.USD30. Management is expecting ASPs for April and May orders to be priced below March orders, before rebounding in June. The ASP rebound expected is mainly to account for the cost increase (i.e. higher raw material costs, labour costs and energy costs). In our view, it will still remain challenging for the glove makers to pass on the entire cost increase, considering that the competition is still intense. Although the recent strengthening of USD should technically augur well for exporters, we opine that Hartalega might not be able to reap the full benefit, seeing that only 35% of its costs are denominated in MYR. On its expansion, commissioning of NGC 1.5 is targeted to be in October 2022, as the Group expects to bring in sufficient foreign labour to man the plant. Pace of line commissioning, will however, depend on the market’s demand and supply dynamics. With only two out of the four plants in NGC 1.5 being constructed currently, the expansion plan for NGC 2.0 will also be placed on the back burner for the time being.

Forecast. Keeping forecasts unchanged as the results were inline.

Maintain HOLD, TP: RM4.21. We roll over our valuation year to CY23f, and our TP is lowered to RM4.21 (from RM5.05 previously). Our PE valuation has also been raised to 19.8x (at -1SD of Hartalega’s pre-pandemic 5-year mean), as it better represent the normalised earnings expected in CY23f. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 11 May 2022