• Stay NEUTRAL, new MYR4.98 TP from MYR5.10, 15% upside with c.3% yield. FY22 (May) earnings met expectations with Hartalega recording its maiden quarterly loss due to the one-off provision for the prosperity tax. Headwinds should persist in the near term, with glove players unlikely to be able to fully pass on the increased costs to customers due to the elevated competition levels. However, utilisation should gradually improve, as Hartalega is expected to hire more foreign workers going forward. This report marks the transfer of coverage to Alexander Chia.

• Earnings within expectations. FY22 earnings of MYR3.2bn were at 101% and 97% of our and consensus’ earnings. Hartalega recorded its first-ever quarterly loss of MYR183.8m, as the full impact of the prosperity tax was baked into the final quarter (c.MYR400m). ASPs continued their downward trend to USD31.00/1,000 pieces (-27% QoQ) while margin was compressed due to the elevated raw material prices. The utilisation rate improved to 70% from 52% in 3QFY22 – management guided that it should remain at c.70% for FY23. A third interim dividend of 3.5 sen was declared for the quarter.

• Headwinds to persist. Due to the enhanced competition within this industry, we believe it will be difficult to fully pass on the rising operating costs to customers. However, management expects ASPs to bottom out by 2H22 as industry players adjust for inflation. The supply chain issue looks set to persist – especially in the near term – with the ongoing lockdowns in Shanghai, China, but there is some respite in terms of labour, as the group is expected to hire more foreign workers thanks to the reopening of international borders.

• Expansion plans intact. Hartalega aims to begin commissioning NGC 1.5 in October. Recall: NGC1.5 includes four additional production plants that will contribute 18bn pieces pa or ppa of gloves to Hartalega’s annual capacity. In the meantime, efforts are being made to prioritise efficiency via the rolling out of automated parking systems and digitalisation of workflows.

• Maintain NEUTRAL with a lower DCF-derived TP of MYR4.98. We trim our FY23F earnings by 2% to account for inflationary costs. Our TP implies 24x P/E on CY23 earnings, which is in line with Hartalega’s pre-pandemic 10-year mean. We ascribed a 0% ESG discount/premium to our TP, as the group’s ESG score is on par with the country median of 3.00.

• Key risks: Higher-/lower-than-expect ASPs, fluctuations in USD/MYR, and changes in raw material prices.

Source: RHB Research - 11 May 2022