HARTA’s FY23 net loss came in narrower than our forecast but was a far cry from a profit expected by the market. 4QFY23 top line grew 12% as a strong sales volume was partially offset by a lower ASP. However, the bottom line was deep in the red due to elevated costs and impairment cost from a plant decommissioning. With no reversal of fortune in sight, we maintain our FY24F net loss, TP of RM1.30 and UNDERPERFORM call.

HARTA’s FY23 net loss of RM218m came in narrower than our net loss forecast of RM330m but was a far cry from the RM59m net profit expected by the market. The variance against our forecast came largely from a better-than-expected sales volume.

QoQ, 4QFY23 revenue rose 12% due to a higher sales volume (+25%) partially offset by a lower ASP (-10%). EBITDA plunged into a deeper loss due to: (i) a RM347m impairment loss hit from decommissioning of Bestari Jaya production facility, (ii) margin erosion as costs remained elevated including natural gas and electricity tariff, and labour costs against falling selling prices, and (iii) reduced economies of scale, particularly, poor cost absorption, as its utilisation rate continued to remain weak albeit higher QoQ at 55% compared to 44% in 3QFY23. This widened 4QFY23 losses to RM303m compared to RM32m in 3QFY23. No dividend was declared in 4QFY23 which came in within our expectation. As a result, FY23 registered a net loss of RM218m compared to a profit of RM3.2b in FY22.

The key takeaways from the analysts briefing yesterday are as follows:

1. It is hopeful that selling prices have bottomed out (at USD20 per 1,000 pieces which is our FY24 assumption) and will attempt to raise prices in FY24. However, the group is mindful that the prospect of raising ASP is challenging due to the current massive overcapacity situation, with only a handful of customers agreeing thus far. Moreover, due to the current competitive pressure emanating from massive oversupply and low industry utilisation averaging 40%, customers can walk away and choose to buy from other players whenever there is an attempt to raise prices. Case in point, buyers can turn to Chinese manufacturers which are still selling below USD20 per 1,000 pieces at USD17 per 1,000 pieces.
    
2. Despite an uptick in orders in 4QFY23, we do not expect sales volume to increase in subsequent quarters, taking our cue from the company’s guidance for persistent oversupply in the market. Taking stock, the group received mixed response in terms of customer inventory levels. Some customers are still stuck with high inventories while others are beginning to slowly restock. Generally, there is no urgency for buyers to place sizeable orders or hold substantial stocks as supply is plentiful and readily available.
    
3. In view of the increasingly challenging business landscape, the group will continue to emphasise better cost management, improve operational efficiencies and scale up automation initiatives. Specifically, the loss in capacity of 13b pieces per annum from decommissioning Bestari Jaya (BJ) production facility is expected to be gradually replaced by newer plants in NGC 1.5 which is expected to see better margins compared to the ageing BJ plants. Recall, NGC 1.5 is expected to have four plants with an estimated capacity of 19b pieces and will be gradually ramp up from end-2023 or early 2024 depending on market conditions. NGC 1.5 is located adjacent to its existing NGC Sepang plant.

Outlook. MARGMA projects 12%-15% growth in the global demand for rubber gloves annually from 2023, following an estimated 19% contraction to 399b pieces in 2022. It believes the supply-demand equilibrium may return in 6-9 months. However, we beg to differ, expecting the overcapacity situation to persist at least over the next two years. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness. Still, capacity is seen to widen further in 2023. We project the demand for gloves to rise by 15% in 2023, which is consistent with MARGMA’s forecast. However, this will do little to ease the overcapacity situation as the global glove production capacity will grow by 16% to 595b pieces during the year as more capacity planned by incumbent and new players during the pandemic years—enticed by super-fat margins that had eventually evaporated—finally comes on-line. This will result in the excess capacity rising by 22% to 137b pieces from 112b pieces in 2022. The widened overcapacity means low prices and depressed plant utilisation will likely persist in 2023. Not helping the already dire situation is the reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of further decline in prices.

Reiterate UNDERPERFORM. We maintain our FY24F numbers as its prospects will remain weak due to subdued ASP and massive capacity leading to suppressed industry utilisation rate, and introduce FY25F numbers. We retain our TP of RM1.30 based on unchanged 0.9x FY24F BVPS, at a 50% discount to the sector’s average of 1.7x charted during previous downturns in 2008-2011 and 2014-2015 as we believe the current downturn could be one of the deepest ever. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 3). We are cautious on the stock due to: (i) the oversupply situation which is expected to persist over the next two years as a result of massive capacity expansion by incumbent as well as new players during the pandemic years means low prices and depressed plant utilisation will likely persist in 2023, and (ii) ASP has yet to bottom out.

Key risks to our recommendation: (i) the industry turning the corner sooner on stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (ii) industry consolidation reducing competition among players, and (iii) epidemic and pandemic occurrences.

Source: Kenanga Research - 10 May 2023