Review

• Hartalega recorded a core loss of RM29.2mn for 1QFY24 (vs. core profit of RM105.6mn in 1QFY23) after excluding the provision for severance pay of RM47mn (decommissioning of Bestari Jaya) and other exceptional items. We consider this as within forecast as FY24 earnings are expected to be back-end loaded.

• The weaker YoY performance in 1QFY24 was not a surprise as the industry continued to grapple with oversupply situation and inventory adjustments by customers. 1QFY24 sales volumes plunged 41.6% YoY while ASP declined by circa-11.2%.

• 1QFY24 core loss stood at RM29.2mn compared to a core profit of 41.4mn in 4QFY23. This was on the back of lower revenue of 14.7% to RM440.0mn in 1QFY24 primarily due to 25.8% decrease in sales volumes, which partially cushioned by higher ASP of about 10% QoQ. Meanwhile, the plant utilisation rate reduced to 41% (vs. 54% in 4QFY23).

Impact

• We maintain FY24-26 earnings projections.

Outlook

• Moving into 2QFY24, we expect the plant utilisation rates to remain below 50% and the ASP would decline by about 2-5% as the manufacturer is expected to share some cost savings from lower natural gas (-11% QoQ) and raw material costs (-16% QoQ) with buyers in the form of lower selling price.

• Meanwhile, we expect operating costs to come down in 2HFY24 as the group are in the midst of production transfer (from Bestari Jaya) to NGC facility. We understand that approximately 1.6k employees (out of 2.9k employees in Bestari) will be deployed to NGC.

Valuation

• We reiterate our Buy recommendation with an unchanged TP of RM2.33/share based on 1.7x FY24 P/B.

Source: TA Research - 10 Aug 2023