Result

• Hartalega registered a net loss of RM195.4m during 4QFY22, which declined 174.3% qoq and 117.5% yoy. Besides, revenue stood at RM968.7m which deteriorated 3.7% qoq and 57.9% yoy.

• As for 12MFY22, the Group’s recorded a net profit of RM3.2b which rose by 12.2% yoy.

• Below our expectation but within consensus. 12MFY22 net profit of RM3.2b is below our in-house expectation, which merely entails 86% of full year earnings estimate but within market expectations (97%). The subdued result was dented by lower average selling price (ASP) coupled with the one-off Cukai Makmur.

• Dividend declared. The Group has declared a third interim dividend of 3.5sen/share during 4QFY22, which brings total dividend payout of 53.5sen/share as year to date for FY22.

Comments

• Surge in global glove supplies, disappointing ASP and Cukai Makmur eroded QoQ results. Hartalega registered revenue growth of -3.7% qoq on the back of lower ASP attributed to an overall surge in global glove supplies. Besides, the Group registered a Loss After Tax (LAT) of RM189.7m, down 174.1% qoq. This was mainly due to the one-off Cukai Makmur where the first RM100m taxable income will be taxed at a rate of 24% and the remaining at a rate of 33%. Moreover, PBT margin shrank by 12.5ppts qoq despite the downward trend of the raw material prices. The decline in raw material prices was not in tandem with the decline in ASP, according to the Group.

• YoY performance deteriorated despite increase in sales volume. Despite sales volume grew by 9%, the Group’s revenue and PBT were down 57.9% and 85.6% yoy respectively, again resulted from normalising ASP. Besides, higher operating cost contributed to decline in PBT margin by 12.5ppts yoy. Current blended ASP is RM132/1000pcs and the declining trend for ASP has been stabilized, the management guided.

• Higher ASP during 1HFY22 spurred 12MFY22 earnings. Cumulatively, revenue rose by 17.7% yoy underpinned by higher ASP in 1HFY2022. This was despite the reduction in sales volume of 22%. On the same note, PBT rose 21.6% yoy driven by higher revenue which was partly offset by hike in raw material costs and other operating costs.

• FY2023 expansion plan. The Group targets to commence its first production line of Next Generation Integrated Glove Manufacturing Complex 1.5 (NGC1.5) (Plant 8-11) in Q4CY2022. The mentioned plants will have a total installed capacity of 19 billion pieces per annum. The Group is in the midst of recruiting more foreign workers to ensure smoothness of the operation in the new plants. The annual installed capacity will enlarge to 63 billion pieces per annum upon completion of NGC 1.5.

• Challenging outlook ahead. The reopening of borders is expected to relieve the shortage of workers issue which has been the thorniest issue not only to the Group but to all players. However, we are aware of the recent implementation of the new minimum wage of RM1,500 which we expect it to further escalate the Group’s operating costs. Moreover, the ongoing Russia-Ukraine conflicts and the lockdown in China’s major cities would exacerbate the already strained global supply chain. This has brought the global logistic disruptions to a greater extent. Looking forward, we deem falling of ASP to rein in if not normalizes to pre-pandemic level against a backdrop of nascent economic recovery amid reopening of markets and borders. The Management is expecting the ASP in Q1FY2023 to rise slightly due to cost inflation resulted from soaring raw material and natural gas prices coupled with the recent raise in minimum wages. Nevertheless, we are still wary of the continued strong market competition from major players which may dampen the ASP upward momentum.

Earnings Outlook/Revision

• We tweak down our FY22F net profit estimates by 17.5% to RM728.7m by lowering our margin assumption to account for anticipated hike in operating costs. Also, we introduce our FY24F net earnings forecast of RM772.6m (6% yoy growth).

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM4.58 (from RM5.05 previously) following our earnings downgrade. Our valuation is now pegged at 21.8x FY23 EPS of 0.21 sen (0.26 sen previously), which is below its mean PE of 31.8x but higher than -1 standard deviation of mean PE of 11.7x. We opine that the industry is undergoing inflationary pressure with surging raw materials prices and wages in an unprecedented manner as well as supply chain disruptions, thus its margin is expected to continue to be hurt going forward.

Source: JF Apex Securities Research - 11 May 2022