Hartalega’s 3QFY23 core LATAMI of -RM25.1m (2QFY23: RM44.2m, 3QFY22: RM263.5m), brought 9MFY23 core PATAMI to RM133.3m (-96.1% YoY). The performance was below our, but above consensus’ estimates at 62% and 84% respectively. Although Hartalega has saw a slight uptick in orders (benefitting from the China glove plants closure for CNY festive and China Covid spike) and will attempt to revise ASPs upwards slightly, we think that the outlook still remains bleak as Hartalega will be affected by the rising electricity and fuel costs. We lower our FY23f/24f/25f earnings forecasts to RM108.2m/-RM74.3m/RM124.2m (from-RM213m/RM349.2m/RM454.3m), mainly to take into account the higher costs. As we expect Hartalega to report losses in the upcoming quarters, we deem the P/E valuation method no longer feasible, hence we are changing our valuation method to a P/B-based methodology instead. We value Hartalega based on a P/B multiple of 0.87x (close to -1.5SD of its recent 5-year average), on a FY24f BVPS of RM1.47. As a result, our TP is lowered to RM1.28 (from RM1.48 previously). Maintain SELL on Hartalega.

Below expectations. Hartalega’s 3QFY23 core LATAMI of -RM25.1m (2QFY23: RM44.2m, 3QFY22: RM263.5m), brought 9MFY23 core PATAMI to RM133.3m (-96.1% YoY). The performance was below our, but above consensus’ estimates at 62% and 84% respectively. 3QFY23 core PATAMI was arrived at after adjusting for EIs amounting to RM6.8m, which mainly consists of foreign exchange losses. The weak showing was a result of soft ASPs, subdued utilisation rates and inability to fully pass on higher costs.

Dividends. None declared (3QFY22: 14.8sen). 9MFY23: 3.5 sen (9MFY22: 69.75sen)

QoQ. Amidst falling ASPs (-8.8%) and sales volume (-14%), revenue reported a 21% decline. Utilisation rate for the quarter also continues to slide lower to 42% (vs 49% in 2QFY23) as the demand-supply mismatch persists. Margins have continued to narrow due to the inability to pass on escalating production costs (i.e. fuel costs, electricity costs and labour costs). As a result of that, Hartalega slipped into the red for the first time, reporting a core LATAMI of -RM25.1m (vs RM44.2m in the preceding quarter).

YoY. Stiff competition resulted in revenue falling -54.1%, as ASPs (-43%) and sales volume (-20%) have continued to decline further. In line with falling revenue and coupled with ballooning production costs (higher energy and manpower costs), Hartalega reported a core LATAMI of -RM25.1m (vs RM263.5m SPLY).

YTD. Revenue tumbled -72.7% on sharp ASP and sales volume (-26.7%) decline, as buyers continue to drawdown on its existing stockpile. Further exacerbated by the growing cost base (higher natural gas and electricity costs, minimum wage revision), core PATAMI declined by a larger degree of -96.1%.

Outlook. Benefitting from the Chinese players’ plants closure for CNY festive and China’s Covid spike, Hartalega saw an uptick in glove orders and expects sales volume to be stronger QoQ in 4QFY23. However, it is still too premature to conclude that the industry is recovering from its trough, as buyers’ purchasing patterns have remained relatively erratic. While Hartalega will also attempt to pass on part of the cost increase to buyers, we do not think that the industry is out of the woods yet, as (i) the demand-supply mismatch persists, (ii) ASP revision likely to be small, and (iii) costs are expected to increase further (mainly fuel costs and electricity costs).

Forecast. We lower our FY23f/24f/25f earnings forecasts to RM108.2m/-RM74.3m/RM124.2m (from RM213m/RM349.2m/RM454.3m), mainly to take into account the higher costs that are expected to kick in in the coming months.

Maintain SELL, TP: RM1.28. Considering that we are expecting Hartalega to report losses in the upcoming quarters, we deem the P/E valuation method no longer feasible, hence we are changing our valuation method to a P/B-based methodology instead. We value Hartalega based on a P/B multiple of 0.87x (close to -1.5SD of its recent 5-year average), on a FY24f BVPS of RM1.47. As a result, our TP is lowered to RM1.28 (from RM1.48 previously). Maintain SELL on Hartalega.

Source: Hong Leong Investment Bank Research - 8 Feb 2023