Result

Hartalega registered a net profit of RM259.6m during 3QFY22 which was depleted 71.6% qoq and 74.1% yoy. On the same note, revenue stood at RM1b which deteriorated 50% qoq and 52.8% yoy.

As for 9MFY22, the Group’s net profit of RM3.4b was escalated by 94.3% yoy on the back of strong revenue, soaring 57.4% yoy.

Within our expectation. 9MFY22 net profit of RM3.4b is deemed within our in-house expectation (85% of full year estimate) after account for weaker 4QFY22 to meet our full year forecast. 9MFY22 results were underpinned by higher average selling price (ASP) during 1HFY22 which offset hike in raw material costs and subdued sales volume (-21% yoy).

Dividend declared. The Group has declared a second interim dividend of 14.8sen/share during 3QFY22, which brings total dividend payout of 50sen/share as year to date for FY22.

Comments

Stiff competition from Chinese glove makers coupled with backlog orders due to shipping constraint bogged down QoQ results. Hartalega’s revenue eased 50% qoq on the back of disappointing PBT which was down 70.3% qoq. Soothing revenue was resulted from lower ASP (-44% qoq) due to improved supply from other glove makers as well as new Chinese comers. Additionally, sales volume was down by 17% qoq due to logistic issue such as capacity constraints on vessel as well as customers adjusted their inventory orders pursuant to continued decline in ASP. Logistic issue had affected c.1b shipment delay during 3QFY22 thus affecting their sales volume. Management said that utilization rate was at 52% during this period (vs 2QFY22:63% qoq). Management expects utilization rate to improve in the next quarter to above 60% banking on improved sales orders as well as easing issue on their shipments.

Disappointing ASP and sales volume dampened YoY growth. The Group’s revenue and PBT were down 52.8% yoy and 73.8% yoy respectively during this period, no thanks to lower ASP as well as lesser sales volume (-42% yoy) amid lower utilization rate (3QFY22: 52% VS 3QFY21: 94%) Besides, PBT margin depleted by 24ppts yoy during this period. Current ASP is at c.USD25/bil pcs and is expected to deteriorate further amid intense supply from Chinese glove makers thus resulting cautious stock-up from customers.

Higher ASP during 1HFY22 spurred 9MFY22 earnings. Cumulatively, revenue soared 57.4% yoy amid strong PBT which jumped 92% yoy arising from higher ASP during 1HFY22 which offset hike in raw material costs and subdued sales volume (-21% yoy). For the remaining quarter, the Group expects prosperity tax to deduct from 4QFY22 earnings about RM350-RM400m.

Challenging outlook ahead. Overall, we deem ASP to continue to taper off going forward and will last till at least 2HCY22 as the sector is experiencing paradigm shift given oversupply condition stemming from Chinese glove makers. We understand that Chinese manufacturers’ ASP is about 7% lower than Harta’s ASP on average. Chinese manufacturers have received rising orders from overseas markets, benefiting from cheaper glove prices offerings. Additionally, the Group is also experiencing shortage of foreign workers due to closure of international borders. Furthermore, raw material costs are still sticky thus hampering the Group’s operating margin moving forward.

Earnings Outlook/Revision

We tweak down our FY22F and FY23F net profit estimates by 7.5% and 52.6% to RM3.7b and RM0.9b respectively by lowering our margin assumption coupled with lower sales volume due to delay in commencement of NGC1.5 (Plant 8-11) to 4QCY22.

Valuation & Recommendation

Maintain HOLD with a lower target price of RM5.05 (from RM5.66 previously) following our earnings downgrade. Our valuation is now pegged at 19.4x FY23 EPS of 0.26 sen (0.56 sen previously), which is below its mean PE of 33x but higher than -1 standard deviation of mean PE of 14.2x. 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 - 9 Feb 2022