Summary

• Hartalega Holdings Bhd’s (HARTA) 1QFY23 net profit sank 96.1% YoY to RM88.3m, mainly dragged down by normalisation of average selling prices (ASP), weaker sales volume, higher energy and labour costs. Revenue for the quarter tumbled 78.3% YoY to RM845.7m.

• The reported earnings came in only at 2.7% of our core net profit forecast of RM801.2m and 15.1% of consensus net profit forecast of RM586.3m. The variance is mainly due to the depressed ASP which has yet to demonstrate any major signs of recovery and weaker-than-expected sales volume.

• Moving forward, further commissioning of remaining plants under NGC 1.5 will be paced in accordance to the demand-supply condition. Still, HARTA remains committed to improve production efficiency through adoption of digitalisation and energy efficient processes.

• We gather that plants utilisation rate has demonstrated stabilisation at approximately 69.0%, as production activity remains uninterrupted. Albeit that, current production is operating well below pre-pandemic levels (80-90%) whereby the meteoric demand during the Covid-19 pandemic has fizzled down.

• Blended ASP continues to decline, falling -12.6% QoQ. Moving forward, we were guided the stiff competition that resulted in the oversupply condition and inventories from previous stockpiling activities have yet to tapered. Thus, we expect this would continue to depress ASP, and we expect prices to remain soft throughout FY23f.

• On a brighter note, the weakening ringgit against the USD remains favourable for the export-oriented glovemakers. Meanwhile, we note that HARTA maintained its leader position among 82 companies in the health care equipment & supplies industry under the MSCI ESG Rating at “AA”.

• Still, we remain cautious on the volatility in raw material prices, on-going shipping constraints, electricity cost, labour shortages and threat of stiff competition from local and overseas players.

Valuation & Recommendation

• We slashed our earnings forecast by 55.5% and 51.9% to RM356.9m and RM434.9m for FY23f and FY24f, after taking into account for the weaker-than-expected ASP and sluggish sales momentum. We maintained our HOLD recommendation on HARTA, but with a lower target price of RM2.61.

• Our target price is derived by ascribing a targeted PER of 25.0x to their revised FY23f EPS of 10.4 sen. The ascribed targeted PER represents -0.5 SD against 5-year historical mean average.

• Downside risks to our recommendation include weaker-than-expected ASP, slower-than-expected sales, as well as a weaker USD against the ringgit. The latter could result in margins compression as HARTA’s sales are mainly export-oriented.

Source: Mplus Research - 10 Aug 2022