Result

• Hartalega registered a net profit of RM88.3m during 1QFY23, which declined 145.2% qoq and 96.1% yoy. Besides, revenue deteriorated 12.7% qoq and 78.3% yoy to stand at RM845.7m.

• Below our and street expectation. 3MFY23 net profit of RM88.3m is below our in-house and street expectation, which merely entails 12% and 15% of full year earnings estimate. The subdued result was dented by lower average selling price (ASP) coupled with flat qoq sales volume.

• No dividend was declared during the quarter under review. However, the Board of directors has proposed a final single tier dividend of 3.5sen/share in respect of FY2022 which is subject to the approval of the shareholders at the forthcoming AGM on 1 September 2022. If the final dividend is approved, it will be paid on 29 September 2022 to the depositors registered in the Record of Depositors at the close of business on 15 September 2022.

Comments

• Dragged by decline in sales volume coupled with descending trend of ASP. 1QFY23 revenue fell 12.7% qoq on the back of descending trend of ASP and flat sales volume (7.3b pcs). PBT margin shrank by 6.7ppts qoq no thanks to hike in energy and labour costs. The ASP for the quarter under review was USD27/1000pcs. The management expect the ASP would continue to trend downward, likely to hit below USD20/1000pcs as a result of continuously strong market competition especially from glove players in China.

• An overall decrease in YoY growth due to comparison to higher base. We deemed the huge downward scale in net profit (-96.1% yoy) was due to comparison with higher base in which the corresponding period (Q1FY22) was at the peak of COVID-19 pandemic. Sales volume was down by 28% yoy while utilisation rate is at 69%.

• Updates on NGC1.5 expansion plan. Previously, the Group has targets to commence its first production line of NGC1.5 (Plant 8-11) in Q4CY2022. However, the Group has had delayed the commencement of the production line due to current supply-demand imbalance situation. As a move to adapt to the challenging environment, the Group said it will switch its focus to cost optimization and ramping up automation to enhance operational efficiency. In addition, the Management also guided that they do not plan any capacity expansion in CY2023.

• Choppy outlook ahead. Moving forward, the Group expects the headwinds to remain amid the plethora of economic and geopolitical factors. Moreover, the Government has also announced that the electricity tariff surcharge of 3.7 sen/kWh implemented for the February to June 2022 period will be maintained in 2HCY22. Thus, we could expect the electricity tariff surcharge would continue to hurt the Group’s margin. Besides, the glove sectors have been contending with overstocked consumers and an overexpanded production capacity that has placed the gloves’ ASP under pressure for long and the Group still sees the issues persist currently. With smaller players exiting the market and customers slowly reducing their inventory level, it will provide some respite to the Group from the headwinds, hopefully. Nevertheless, we reckon that continued strong market competition from major Chinese players which intend to expand their market share may further dampen the gloves’ ASP going forward.

Earnings Outlook/Revision

• We tweak down our FY23F an FY24F net profit estimates by 47.1% and 48.9% to RM343.2m and RM378.1m respectively by lowering our margin assumption to account for soaring operating costs and downward trend in ASP arising from competitive environment.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM2.57 (from RM4.58 previously) following our earnings downgrade. Our valuation is now pegged at 25.7x FY23 EPS of 0.10 sen (0.21 sen previously), which is below its mean PE of 30.4x but higher than -1 standard deviation of mean PE of 9.7x. We opine that the industry is undergoing supply demand imbalance and escalating operating costs is expected to hurt the Group’s margin going forward.

Source: JF Apex Securities Research - 10 Aug 2022