Hartalega’s 1QFY23 core PATAMI of RM114.2m (-26% QoQ, -95% YoY) came in within our, but missed consensus estimates, at 23% and 19% respectively. Weaker performance was mainly due to the effect of operating leverage as well as higher operating costs. Outlook wise, management have guided that the competition remains intense and is expecting both ASPs and utilisation rates to continue trending lower. We cut our earnings forecast for FY23-24f by 18-24% as we lower our utilisation rate assumption. Maintain SELL on Hartalega, with a lower TP of RM1.92, implying a PE of 16x (at -1.5SD of pre-pandemic 5-year mean) on its CY23f EPS of 12.0sen.

Starting in line. Hartalega’s 1QFY23 core PATAMI of RM114.2m (-26% QoQ, -95% YoY) came in within ours, but missed consensus estimates, at 23% and 19% respectively. Core PATAMI was arrived at after adding back EIs (mainly fair value loss on derivatives) amounting to RM26m.

Dividends. Declared dividend of 3.5 sen per share. (1QFY22: 19.75 sen).

QoQ. Revenue was down by 13%, predominantly due to lower ASPs (-12%) as sales volume remained relatively flat QoQ. Despite utilisation rate remained unchanged at 69%, EBITDA margins narrowed by 6 ppts, owing to the rising energy and labour costs. All in, core PATAMI recorded a 26% decline.

YoY. With both ASPs (-70%) and sales volume (-33%) declining on the back of normalising glove demand, Hartalega reported a 78% slump in revenue. Coupled with the effects of operating leverage and higher operating costs, core PATAMI recorded a 96% decline from its record-high quarterly profit in 1QFY22.

Outlook. In view of the intense market competition, management is expecting utilisation rate to decline going forward and current utilisation hovers around 50-60% (in line with industry players). ASPs are also expected to persist at low-USD20 level per thousand gloves in the near term. Separately, NGC1.5 that was previously scheduled for commissioning in October 2022 has also been further postponed and expansion plans are only expected to be revived when market situation improves. Hartalega has also decommissioned some of its older plants to reduce its overall installed capacity and operating cost.

At risk of exclusion. We caution that Hartalega could be at risk of being booted out of the KLCI in the upcoming FTSE Bursa Malaysia KLCI semi-annual review should its share price deteriorate further, as it currently ranks at the 35th spot (based on 9th Aug closing). According to the index ground rules, constituents could potentially be removed from the index if it falls below the 35th spot. A selldown might be triggered if the constituent change materialises.

Forecast. We trim our FY23-24f earnings forecasts by 18-24%, as we lower our utilisation rate for FY23/24f to 63%/73% (from 78%/78% previously). At the same time, we also introduce our FY25f earnings forecast of RM575m.

Maintain SELL, TP: RM1.92. Subsequent to our earnings adjustment, our TP is lowered to RM1.92 (from RM2.37 previously). Our TP implies a valuation 16.0x (at -1.5SD of Hartalega’s pre-pandemic 5-year mean) on its CY23f EPS of 12.0sen. Maintain SELL on Hartalega.

Source: Hong Leong Investment Bank Research - 10 Aug 2022