• Still NEUTRAL, higher MYR2.38 TP (DCF) from MYR2.11, 5% upside. Hartalega returned to the black with its 4QFY23 (Mar) earnings, bringing FY23 core earnings to MYR109m – at 84% and 87% above Street’s and our expectations – underpinned by a pick-up in volumes sold during 4QFY23. Management’s tone was slightly upbeat, as the decommissioning of obsolete plants (expected to be completed by end 2023) and normalisation of raw material prices could offer some breathing space, moving forward.

• Results overview. Hartalega delivered 4QFY23 core earnings of MYR36m from a net loss of MYR38m in 3QFY23, bringing FY23 to MYR109m (-97% YoY) – at 84% and 87% above Street’s and our expectations. Volumes sold picked up 25% QoQ to 5.7bn pieces, offset by a 6% QoQ decline in ASPs to c.USD20.50 per 1000 pieces.

• Cost. YTD, acrylonitrile and latex costs were down 4% and up 2% respectively. Gas tariffs were down 14-15% QoQ and are expected to trend further downwards, in view of the normalisation of natural gas prices.

• Outlook. We remain cautiously optimistic on Malaysia’s rubber glove sector, with the industry’s excess supply capacity expected to slow down glovemakers’ capacity expansions in the near term. However, there are improvements in market dynamics, such as: i) The collective cost pass- through initiated by local and regional peers; ii) correction in natural gas prices (YTD: -50%); and iii) a disciplined approach in scaling back new capacity plans. While cost-pass-through remains challenging in the near term, ASPs are holding up at c.USD20 per 1000 pieces. Post the decommissioning of the Bestari Jaya plant, the group is looking to commission NGC1.5 progressively by end 2023 or early 2024, depending on market dynamics.

• Earnings adjustment. We raised our earnings estimates by 11% and 1% for FY24-25, after factoring the potential commissioning of NGC1.5 (in Jan 2024) and better plant utilisation rates, with customer inventory expected to be fully depleted by end 2023.

• Still NEUTRAL. Post earnings adjustment, we derived a higher TP of MYR2.38, which implies CY24 P/E of 22x vs the pre-pandemic 5-year historical mean of 27x. Our TP includes a 2% ESG discount, based on Hartalega’s 2.9 ESG score. Key risks: Higher/lower-than-expected sales volumes, stronger/weaker-than-expected USD to MYR, lower/higher-than- expected raw material prices.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. We now assign a weightage of 50% to the E pillar, and 25% each to the S and G pillars. Further details are in our 2 May thematic research note Envisioning a Better Future.

Source: RHB Research - 10 May 2023