Results

• 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.  

Source: JF Apex Securities Research - 10 May 2023