Result

• Hartalega posted a net profit of RM914m during 2QFY22 which was down 59.5% qoq but up 67.7% yoy. Meanwhile, revenue stood at RM2b which depleted 48.5% qoq but improved 49.4% yoy.
• As for 1HFY22, the Group’s net profit of RM3.2b was jumped 315% yoy on the back of strong revenue, soaring 161% yoy.
• Above expectations. 6MFY22 net profit exceeds our in-house (103.2%) and market estimates (82.1%) of full year net profit forecast. This was underpinned by higher average selling price (ASP) which offset hike in raw material costs and subdued sales volume (-11% yoy).
• Dividend declared. The Group has declared a first interim dividend of 35.2sen/share during 2QFY22, which make up 74.5% of our FY22F dividend assumption.

Comments

• Soothing QoQ as plants shut down and lower ASP. Hartalega’s revenue eased 48.5% qoq as revenue tumbled following lower sales volume (-34% qoq) and decline in ASP (-27% qoq). Lesser sales volume was due to Enhanced Movement Control Order (EMCO) in July’21 as plants were shut down and subsequently operated at 60% workforce capacity following the National Recovery Plan (NRP). Additionally, PBT margin also down by 14.7ppts qoq in view of higher material costs as well as higher operating cost following lower utilization rate (c.60% level). Management guided that current utilization rate is about 60% to 70% level and expects to run within 70% to 80% utilization rate in Jan’22 as demand for rubber gloves normalized. Currently, customers are still adjusting their inventory level and bought at minimum order following recent drop in ASP. Addition, management guide that ASP will be around USD30-USD35 per thousand pieces for the next quarter.
• Sturdy YoY due to lower base. The Group’s revenue and PBT jumped 49.4% yoy and 73.9% yoy respectively during this period, thanks to higher blended ASP [ASP (USD/'000 pcs): +114% yoy] despite lower sales volume (-30% yoy). Besides, PBT margin inched up by 8.3ppts yoy given sturdy topline which mitigated the impact of higher material costs. The Group said that they are consistently negotiating with the nitrile makers on pricing so that they would buy at affordable raw material prices.
• Higher ASP spurred 1HFY22 earnings. Cumulatively, revenue soared 161% yoy amid strong PBT which jumped 325.5% yoy given sturdy ASP hike during this period. Looking forward, the Group expects step-up in gloves demand starting Jan’22 as China players to experience higher energy cost due to recent power crisis and other industry players to hold back expansion (especially local new players) amid current easing Covid-19 cases on the back of normalised ASP.
• Prosperity tax to hurt earnings. On the recent Budget 2022 announcement, Hartalega is among the companies which will be impacted by special one-off “Cukai Makmur”, as this tax will be imposed to high-income companies for the assessment year 2022. Management expect that prosperity tax could hamper the Group’s earnings c.RM400m for 2HFY22.
• Challenging outlook ahead. Overall, we deem ASP to continue to taper off going forward and will normalize at least in 2HCY22 onwards as the sector is experiencing paradigm shift given oversupply condition stemming from Chinese glove makers. Chinese manufacturers have received rising orders from overseas market, benefiting from order delay from our industry players pursuant to limited production capacity as a result of restriction imposed recently. We understand that Chinese glove makers are expanding their productions currently after receiving massive orders from overseas market especially the US and some European countries for the past few months. Despite recent downtrend in ASP, raw material costs are still sticky thus hampering the Group’s operating margin moving forward.

Earnings Outlook/Revision

• In view of our lower-than-expected forecasts, we lift our FY22F and FY23F net profit estimates by 29% and 5.6% to RM4b and RM1.9b respectively by increasing our margin assumption coupled with higher sales volume upon full commission of Plant 7 in Apr’22 under expansion of NGC1.5.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM5.66 (from RM7.00 previously) as we assign lower PE of 10.1x (11.5x previously) FY23 EPS of 0.56 sen, lower than -1 standard deviation of 17.4x. The lower PE assigned is in view of soothing outlook for rubber glove industry following decline in ASP and losing market share to Chinese glove makers. We reckon that the industry is currently undergoing a paradigm shift in respect of supply and demand dynamics with concern on oversupply of global glove especially production coming from China which will weigh on the Group’s ASP, thus affecting its margin moving forward. Furthermore, the rising raw material prices also exacerbate the current circumstances.

Source: JF Apex Securities Research - 3 Nov 2021