Results

• Hartalega Holdings Berhad reported a net loss of RM52.5 million in 1QFY24, marking an increase of 82.7% qoq compared to the previous quarter and a decrease of 159.5% yoy compared to the same period last year. Meanwhile, the company posted a revenue of RM440.0 million, reflecting a decline of 14.7% qoq compared to the previous quarter and a decrease of 48.0% yoy compared to the same period last year.

• Loss-making. The net loss recorded in the 1QFY24 is not in line with our projected expectations, and it does not correspond with our forecasted net earnings for the same period. However, the reported revenue does match our anticipated figures, accounting for 21.3% of the projected full-year revenue. Conversely, revenue for 1QFY24 falls short of the consensus full-year target, achieving only 19.0% of the projected amount.

• Lower sales volume… When comparing the quantity in the 1QFY24 to that of the 4QFY23, there is a notable decrease of 25% qoq and 41% yoy to 4.3 billion pieces. This decline can be attributed to a reduction in sales volume by 26%, which is a consequence of the ongoing oversupply situation and the adjustments in the supply chain inventory.

• … but cushioned by marginal increase in ASP. Hartalega managed to attain a slightly elevated ASP in the 1QFY24. The reported revenue of RM440.0 million would have been notably lower if the Group had not implemented ASP increase measures in the preceding quarters.

• The operational utilization rate dropped to 41% in the 1QFY24, in contrast to the 54% recorded in the 4QFY23.

• The current cash balance stands at RM1.7 billion, experiencing a slight decrease of 3% in comparison to the cash balance of the preceding quarter.

• The reduction in losses at the loss before tax level to RM44.7 million (+86.5%) can be attributed to the one-off impairment impact recorded in the prior quarter, which amounted to -RM331.4 million.

• No dividend was declared. There were no dividends declared by the management for the 1QFY24. Given the difficult business outlook, we have updated the projected DPS from 0.99 sen to 0.50 sen, resulting in a yield of 0.2%.

Comments

• The competitive nature of ASPs remains unchanged. According to the management, there is no forecasted decrease in the average selling price (ASP) for the coming periods. At present, ASPs are situated between $20 and $22 per 1000 units, and Hartalega is striving for ASP increments. Customers are progressively becoming more open to the idea of higher ASPs that are foreseen in the future.

• In the midst of an increasingly challenging business landscape, the Group will continue to give priority to improved cost management, enhanced operational efficiencies, and the expansion of automation initiatives across all our operations. The Group's commitment to advancing sustainability and social compliance practices as part of the ESG agenda will also persist.

• As we look forward, the Group holds a positive view of the sector's long-term prospects but we remain cautious in short term as headwinds persist.

Earnings Outlook / Revision

• We hold our bottomline estimates at RM159.2 million for FY24F, and RM260.3 million for FY25F, as we expect earnings to have a slight improvement in the coming quarters. Similarly, we maintained our revenue forecast for FY24F at RM2,071.3 million, as it aligns with the posted 1QFY24 revenue. The reason for our FY24F net earnings forecast being slightly lower than the consensus is our projection of a continued challenging business landscape, oversaturation of the market, strong challenge by the regional peers, and also the pricing pressure faced.

Valuation and Recommendation

• Our SELL call is maintained for Hartalega Holdings Berhad with a lower target price of RM1.61 (10% lower from the previous TP of RM1.79).

• Our valuation is now pegged at 49.5x PE multiple with FY25F EPS of 3.3 sen. The given PE multiple is lower than its 5Y +1 Std Dev PE of 50.1x, which previously we pegged with 55x PE multiple.

• The PE multiple is justified by its effort in i) emphasising cost optimisation measures, ii) improving operational efficiencies, and iii) the initiative to accelerate automation across its operation.

• However, we do not ascribe more than the given PE multiple due to the i) strong competition from regional peers, ii) inability to sustain its sales quantities, iii) higher operating cost, iv) dropped in utilisation rate.

Source: JF Apex Securities Research - 10 Aug 2023