Results

• Hartalega fell into the red after posting a net loss of  RM31.9m in 3QFY23, compared with net profits of  RM28.3m in the previous quarter and RM259.6m a  year ago. Meanwhile, topline dropped 21.0% qoq from  RM584.6m and 54.1% yoy from RM1,005.4m, to RM461.8m.

• Below expectation. 9MFY23 net profit of RM84.7m which  plummeted 97.5% yoy (9MFY22: RM3,432.6m) has achieved 40.8%/53.6% of in-house/street full year forecast. However,  the 9MFY23 revenue of RM1892.1m entails 81.3%/70.6% of our/consensus full year forecast.

• Disappointing QoQ. 3QFY23 revenue of RM461.8m has  decreased by RM123.0m or 21.0% from the previous  quarter’s RM584.6m. This is due to the decline in sales volume from previous quarter by 5% and lower ASP resulting from intense price competition.

• Affected margins. Hartalega recorded a loss before tax of  RM30.7m in 3QFY23 compared to PBTs of RM37.3m in the previous quarter and RM352.4m a year ago. Apart from the lower topline, the Group’s margin was also hit by higher operating costs as natural gas tariffs has increased by 25%.

• Poor YoY performance. The decrease in net profit for both  3QFY23 (-112.3% YoY) and 9MFY23 (-72.7% YoY) was in tandem with the significant decline in revenue. This is  primarily due to the normalisation of ASP coupled with lower  sales volume, as well as intense global market competition

Comments

• Challenging landscape likely to persist. The oversupply situation is expected to continue further in CY2023. This is due to the aggressive expansions of the market players coupled with customers’ stockpiling activity have led to the imbalance of supply and demand in the market. However, we were guided that the fall will be cushioned, as some of the major players have announced to postpone their expansion plans as well as the exits of new entrants.

• Anticipate a higher operating cost, moving forward.  The management sees that there will be an increase in energy cost, electricity cost as well as raw materials. As such,  the pressure on operating margins would continue to hit amidst the current moderation of ASP (US$20/1000 pcs). Hence, the headwinds are likely to persist in the short term.

• Operates 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, resulting in Hartalega decommissioning its Plant 3.

• Challenging future prospect – 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 pre-pandemic level.

Earnings Outlook / Revision

• We cut down our FY23F and FY24F bottomline forecast by 41.2% and 12.3% to RM122.2m and  RM267.4m respectively, after taking into consideration the higher operating cost as well as strong market competition coupled with challenging landscape in the rubber glove sector. 

Valuation and Recommendation

• Downgraded to SELL with a target price of RM1.40 (from RM1.94 previously), 11.4% downside from the current price of RM1.58, following our earnings downgrade. Our valuation/target price is now pegged at PE  multiple of 17.5x FY24F EPS of 8.0 sen, which is lower than its 5Y mean PER of 29.1x but higher than 5Y -1 Std Dev PER  of 8.3x. We believe that the given PE multiple is justified in view of deterioration of ASP, challenging sectorial landscape coupled with the bump up in operating cost i.e. energy cost,  electricity cost.  

Source: JF Apex Securities Research - 8 Feb 2023