Hartalega recorded a net loss of RM302.8m in the final quarter of FY23, which is a significant increase compared to the previous quarter's loss of RM31.9m. However, the revenue for the current quarter showed an increase of 11.7% to RM515.7m compared to 3QFY23. On a yearly basis, revenue for 4QFY23 dropped 46.8% yoy from RM968.7m in 4QFY22, while net loss widened 55% yoy from RM195.4m in the same quarter last year.
Within expectation. 12MFY23 net loss of RM218.1m plummeted 106.7% yoy from 12MFY22 (net profit of RM3.2b) which was caused by the surprise one-off impairment of RM347m due to the decommissioning of Bestari Jaya facility. Excluding the impairment, 12MFY23 core earning stands at RM180.8m (entails 100% from our forecast) and is within our expectation which we forecasted at RM180.4m. However, 12MFY23 revenue has exceeded our forecast by 8.0% and street forecast by 7.0%.
Higher sales volume QoQ. Revenue in the current quarter rose 11.7% qoq, equivalent to RM53.9m, as compared to the previous quarter. This increase was attributed to the higher sales volume recorded as some customers' inventory returned to normal levels.
Dismal QoQ as well as YoY. 4QFY23 loss before tax of RM331.4m which decreased by 979.5% qoq and 251.7% yoy was mainly attributable to a one-off impairment loss of assets of RM347m, intense market competition as well as higher operating cost. This makes the net loss to RM302.8m in the current quarter and RM218.1m in the full-year of FY23.
Unsatisfied margins. 12MFY23 PBT margins dropped to - 7.9% as compared to 12MFY22, at 58.8%. On a quarterly basis, the PBT margin plunged to -64.3% in 4QFY23. These declined margins were affected by the decommissioning of the Bestari Jaya plant, mainly the impairment.
Net cash of RM1.7b. Despite the net loss incurred in the last quarter of FY23, Hartalega's financial position remains robust, supported by its healthy balance sheet with a net cash position of RM1.7b at the end of the financial year. This indicates that the company has sufficient cash reserves to fund its operations and investments, providing a solid foundation for its future growth plans.
No dividend was declared for this quarter, 4FY23
Comments
ASPs remain competitive. According to the management, there is no expectation of a decrease in average selling price (ASP) in the future. Presently, ASP ranges from $20 to $22 per 1000 pieces, and Hartalega is aiming to increase ASPs. Customers are gradually becoming more accepting of the higher ASPs expected in the future.
Decommission of the Bestari Jaya production facility. The decommissioning process involves the removal of four plants and approximately 40 production lines, which will take up to six months to complete, and a reduction in cost will be seen during CY24 (4QFY24). The management has stated that the purpose of this exercise is to eliminate inefficient assets that are constrained by outdated technologies as well as generate higher energy and labour cost. Additionally, if there is a need for capacity expansion in the future, the NGC1.5 plant will be available by the end of CY23 or early CY24.
The current cost environment is challenging, but it is expected to improve in the future. As costs remain challenging, glove manufacturers are facing increased operating expenses, such as higher energy and labour costs. Some manufacturers have attempted to pass on these additional costs to consumers, but this has been met with mixed results due to the highly competitive market. As a result, operating margins are likely to remain under pressure. As such, upon completion of the decommissioning of the Bestari Jaya facility, Hartalega can expect a reduction in related operating costs.
Earnings Outlook / Revision
Our updated projections for net profit in FY24F have been lowered to RM159.2m, reflecting a 40% reduction from our previous estimate of RM267.4m. This revision considers various factors, including the normalisation of the utilisation rate, expected sales volume, and associated costs. Additionally, we are introducing our FY25F bottom line forecast, which stands at RM260.3m, with a projected net profit margin of 9.7%, driven by higher sales volume assumption as well as higher ASPs.
Valuation and Recommendation
Maintained SELL with a target price of RM1.79 (previously RM1.40), 20.9% downside from the current price of RM2.26, as we roll over to FY25F forecasts.
Our valuation is now pegged with PE multiple of 55x FY25F EPS of 3.3sen.
The PE multiple is lower than 5Y +2 Std Dv of 71.2x but higher than its 5Y +1Std Dv of 50.0x.
In our opinion, the current PE multiple for Hartalega is reasonable, considering the company's ability to maintain the current ASP and effectively manage its costs in the future. Furthermore, the normalization of the production utilization rate provides additional support for this valuation.
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