• Maintain NEUTRAL and a DCF-derived TP of MYR5.10, 8% downside with c.2% yield. Hartalega’s 9MFY22 (Mar) earnings are below estimates, on a lower-than-expected sales volume attributed to logistical challenges. Margins are likely to be depressed further, from persistent pricing competition in the shorter term, but its sales volume may get a boost once the supply chain and labour requirement bottleneck situation normalises.

• 9MFY22 core net profit below our expectations; a likely core net loss in 4QFY22F. The negative surprise mainly came from a lower-than-expected sales volume, which in turn was due to continued tepid demand and capacity constraints on shipping vessels. The latter was particularly acute, and this led to 1bn pieces in backlog orders waiting to be shipped. For 3QFY22, ASP declined to USD43.00 per thousand pieces (-40% QoQ) while sales volume dipped to 5.5bn pcs (-17% QoQ). Its utilisation rate for the quarter stood at a low 52%. Additionally, a second interim DPS of 14.8 sen was declared (after accounting for the prosperity tax impact) for the quarter.

• Margin compression to continue moving forward. Moving into 4QFY22F, ASPs are likely to range at USD27.00-28.00 (implying a 35% decline QoQ) and, similarly, raw material costs are expected to moderate. Pricing pressure from China still persists, as its manufacturers are willing to absorb the recent 7.5% tariff imposed by the US. HART has noted increased orders, as prices trend closer to pre-COVID-19 levels, but persistent logistics issues paired with a labour shortage should continue to be a drag on volume growth. As such, margins may dip below pre-pandemic levels, before undergoing an uplift when these issues normalise.

• 4QFY22F numbers to bear the brunt of the prosperity tax impact. As the proposed prosperity tax was gazetted on 31 Dec 2021, the one-off estimated full impact of MYR350-400m will be baked into the final quarter – likely dragging HART’s performance into the red.

• Further delays in expansion plans. Currently, eight out of nine lines in Plant 7 (2.6bn pieces per annum (ppa) in total) have been commissioned. The target commissioning date for NGC1.5 has been pushed back further to Oct 2022 (from Apr 2022), given the current supply-demand dynamics. NGC1.5 includes four additional production plants which will contribute 19bn ppa to its annual capacity. In the meantime, efforts are being made to prioritise efficiency through the rollout of automated packing systems and the digitalisation of workflow.

• We cut FY22F earnings by 7% after trimming our sales volume assumption, to account for the slower deliveries.

• Maintain NEUTRAL and a DCF-derived TP of MYR5.10, after updating our valuation table with the latest balance sheet changes and rolling our valuation base year to FY23. Our TP implies 23x CY23 P/E, in line with its pre-pandemic 10-year mean. We did not ascribe an ESG discount/premium to our TP, as HART’s ESG score is on par with the country median of 3.

• Key upside/down risks: Lifting/imposition of a US Customs and Border Patrol ban, higher/lower-than-expect ASPs, fluctuations in USD/MYR, and changes in raw material prices.

Source: RHB Securities Research - 9 Feb 2022