FY22 PATAMI of RM3,235m (+12% YoY) came in within expectations, at 94%/98% of our/consensus full-year forecasts. Excluding the one-off prosperity tax, normalised 4QFY22 net profit is expected to come in at RM152m bringing FY22 net profit to RM3,584m. We downgrade our FY23E net profit by 16% taking into account: (i) ASP reduced from USD26 to USD25 per 1,000 pieces, and (ii) EBITDA margin shaved from 22% to 20%. TP is reduced from RM7.00 to RM5.60 based on 30x CY23E EPS. Reiterate OUTPERFORM.

QoQ, 4QFY22 revenue fell 4%, due to lower ASP (-28%) but offset by higher volume sales (+33%). The higher sales were attributed to back- logged orders from previous quarter due to logistic challenges such as capacity constraints on shipping vessels. EBITDA margin decreased by 12ppt from 37% in 3QFY22 to 25% in 4QFY22 due to lower ASP which fell faster than a corresponding decline in input raw material cost. This brings 4QFY22 reported loss or LATAMI to RM198m compared to a profit of RM259m in 3QFY22, dragged down by one-off prosperity tax which we guesstimate at RM350m. Excluding this one-off prosperity tax in 4QFY22, normalised net profit is RM152m. A 3rd interim DPS of 3.50 sen was declared, bringing FY22 DPS to 53.50 sen. We expect a final dividend in 3QCY22. YTD, FY22 PATAMI of RM3,235m was driven by an 18% surge in revenue, underpinned by higher ASP (+39%) which more than offset lower volume sales (-15%).

Outlook. In the 4QFY22 result briefing, management highlighted that back-logged orders in 3QFY22 were captured in 4QFY22 which boosted utilisation rate to 70% compared to 52% in 3QFY22. However, the shipping delay is expected to continue in subsequent quarters whereby order back log will continue. Separately, due to higher operating cost including higher minimum wage, ASPs are expected to inch up slightly starting from June delivery but this is insufficient to fully pass on the cost increases. With a cash chest of RM2.4b as at 31 March 2022, the group could be on a lookout for any merger/acquisition potential going forward. Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. In line with the growing rubber glove demand globally, the Group will continue to expand capacity in NGC, Sepang. To date, 8 out of 9 lines in Plant 7 have been commissioned. Upon full commissioning, Plant 7 will have an annual installed capacity of 2.6b pieces. The construction for the upcoming expansion under NGC 1.5, is currently underway and the Group targets to commission the first line by 4Q 2022. NGC 1.5 will house 4 additional production plants which will contribute 19b pieces to the annual installed capacity. With the completion of NGC 1.5, the Group’s annual installed capacity will increase to 63b pieces per annum.

We lower our FY23E net profit by 16%. We downgrade our FY23E net profit by 16% taking into account: (i) ASP reduced from USD26 to USD25 per 1,000 pieces, and (ii) EBITDA margin shaved from 22% to 20%. We also introduce FY24E numbers into our earnings model.

Reiterate OP. TP is reduced from RM7.00 to RM5.60 based on 30x CY23E EPS (at slightly above 5-year pre-COVID forward historical mean). We rollover our valuation from CY22E to CY23E. We like Hartalega due to its solid management and margins of which are head and shoulders above its peers. Since ASPs are no longer lofty, expectations of disappointments in subsequent quarters are expected to be capped.

Risk to our call is lower-than-expected ASP.

Source: Kenanga Research - 11 May 2022