HARTA’s 1HFY24 results beat our forecast but only met market expectation. It returned to the black in 2QFY24, thanks largely to lower input costs. It acknowledged that demand visibility is still lacking at present. We now project a RM42m net profit in FY24F (from a RM105m loss) and raise our FY25F net profit by 92%. We lift our TP by 26% to RM2.33 (from RM1.85) but reiterate our MARKET PERFORM call.

HARTA’s 1HFY24 results beat our expectation with a narrower-thanexpected net loss of RM25m vs. our full-year net loss forecast of RM105m. The results met market expectation - assuming HARTA is to remain profitable in the remaining quarters, it is on track to meet the full-year consensus net profit estimate of RM33m. The variance against our forecast came largely from lower-than-expected input costs.

QoQ, its 2QFY24 revenue rose 3% due to a higher sales volume (+8%) which more than offset lower ASP (-5%). Its EBITDA returned to the black at RM49m compared to a loss of RM10m in 1QFY24 due to: (i) the absence of provision of severance pay incurred in the decommissioning of Bestari Jaya’s production facility in 1QFY24, (ii) a lower natural gas price (-8%) and input raw material prices (-15%), and (iii) marginally improved utilisation rate at 44% compared to 41% in 1QFY24. As a result, 2QFY24 returned to the black registering a net profit of RM28m compared to a loss of RM52.5m in 1QFY24. No dividend was declared in 2QFY24 which came in within our expectation. YoY, its 1HFY24 revenue dropped 38% due to lower ASP (-15%) and volume sales (-27%). This resulted in a 1HFY24 net loss of RM25m compared to a profit of RM117m in 1HFY23.

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

1. The group expect a gradual uptick in orders and expect 3QFY24 sales volume to be higher than in 2QFY24 underpinned by inventory rebuilding from distributors indicating early signs of potential recovery in demand. Beyond 3QFY24, the group expect volatile quarterly sales order as distributors or buyers sees no urgency to place sizeable orders or hold substantial stocks as supply is plentiful and readily available.

2. ASP is expected to be lower in the next two quarters following the sequential weakness in natural gas price. Since natural gas price has declined sequentially in 3QCY23 (2QFY24), typically glove players have to pass on the cost savings to customers. However, 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 USD15−17 per 1,000 pieces.

3. The group is of the view that capacity rationalisation and improvement in operational and cost efficiencies following from decommissioning the Bestari Jaya (BJ) production facility is expected to bear fruits and flow down to bottom line starting from 1QCY24. Specifically, due to the overprovision made on decommissioning the Bestari Jaya plant, the group expect some writebacks and cost savings of approximately RM2m-RM3m per month which is expected to be reflected starting from 4QFY24.

Outlook. We expect the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply. Nevertheless, we expect the oversupply situation to be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective plants. 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. 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 12 months. We project the demand for gloves to rise by 15% in 2023, which is consistent with MARGMA’s forecast. This will result in an excess capacity of 112b pieces which is similar to CY22. Despite the improvement, the overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry.

Forecasts. We now forecast a net profit of RM42m in FY24 (previously net loss of RM105m) as we now assume a higher EBITDA margin of 11% (previously 2%) due to lower-than-expected input raw material and natural gas prices. We raise our FY25F net profit by 92% as we lift our EBITDA margin assumption to 13% (from 11%).

We raise our TP by 26% to RM2.33 (previously RM1.85) based on 1.7x FY25F (previously 1.4x and based on FY24F), in line with the sector’s average of 1.7x charted during previous downturns in 2008−2011 and 2014−2015. We roll over our valuation from FY24F to FY25F and removed the 20% discount to sector’s average down-cycle valuation since HARTA has demonstrated a more disciplined production capacity cut at 32% compared to peers of 10%-12%. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 3). Maintain MARKET PERFORM.

Key risks to our recommendation include: (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 - 8 Nov 2023