Results

• Hartalega registered a net profit of RM28.3m during  this quarter (2QFY23), which dropped 67.9% qoq  and 96.9% yoy. On the other hand, revenue slipped  30.9% qoq and 70.9% yoy to RM584.6m.

• Results below expectation. 6MFY23 net profit of  RM116.6m (-96.3% yoy) achieved 52%/46% of  our/consensus full year forecast. However, the net profit  only entails 34%/37% of our/consensus full year forecast. 

• Lower QoQ – Hartalega’s 2QFY23 revenue decreased by  RM261m or 30.9% qoq to RM584.6m mainly attributable to  the decline in sales volume by 33% and normalising ASP.

• Declined margins – Hartalega’s net profit margin slumped (-5.6 ppts qoq) to single-digit at 4.8% as compared to  10.4% in the previous quarter due to higher operating cost  as its utilisation rate was lower.

• Disappointing YoY performance – For 6MFY23, the  Group registered a lower revenue of RM1,430.2m which  dropped by RM4,483.8m or 75.8% YoY from the preceding  year (6MFY22) due to intense market competition,  normalising ASP and decreased in sales volume by 27%. In  addition, PBT decreased significantly to RM171.5m (-95.8%  yoy) as compared to RM4.07b in 6MFY22. 

Comments

• Global headwinds persist – Global post-pandemic  economic recovery will continue to be impacted by external  concerns. The unsolved geopolitical conflict between Russia  and Ukraine, China's ongoing implementation of its zeroCovid policy, and the rising global inflation will all continue  to be global headwinds which indirectly affect the Group.

• Rising operation cost – The glove sector has experienced  rising operating cost as inflationary pressure due to the  increasing natural gas, electricity tariffs and also new  minimum wage all in the same year. 

• Running at low utilisation levels – The continuous  global oversupply situation has resulted in the industry to  operate at suboptimal utilisation level. The overcapacity  from expansion and buyer’s excessive stockpiling has led to market supply and demand imbalance.

• Outlook remains uncertain – Moving forward, the Group  will continue to stand strong in the view of challenging  business landscape. Moreover, the Group will continue to  emphasise better cost management, improve operational  efficiencies and scale up automation for the operational  activities. In the light of this, Hartalega are cautiously  optimistic on the future prospects of the sector. In addition,  we opine that the ‘hazy’ market condition, supply and  demand imbalance will further dampen the ASP to prepandemic level.

Earnings Outlook / Revision

• We cut down our FY23F and FY24F net profit  estimates by 39% and 19% to RM207.7m and  RM304.8m respectively after taking into  consideration the challenging landscape in the glove  industry, rising operating cost as well as normalising ASP arising from the imbalance of supply and  demand situation.

Valuation and Recommendation

• Maintain HOLD with a lower target price of RM1.94 (from RM2.57 previously) following our earnings  downgrade. Our valuation is now pegged at PE multiple of  21.6x FY24 EPS of 9 sen which below its mean PE of 29.2x but slightly higher than -0.5 standard deviation of mean PE  of 19.1x.  

Source: JF Apex Securities Research - 9 Nov 2022