Investment Highlights

• We maintain HOLD on Hartalega Holdings (Hartalega) with a lower fair value of RM2.46/share (from RM4.55/share), which incorporates a 3% premium to reflect our unchanged ESG rating of 4 stars. Our valuation method remains based on FY24F PE of 18x, at parity to its 3-year median.

• The lower fair value mainly stems from revised earnings assumptions as Hartalega’s 1QFY23 core net profit of RM99.5mil came in below expectations, accounting for 11% of our earlier FY23F net profit and 17% of consensus.

• Hence we cut FY23–25F earnings by 79.4%/44.5%/28.6% mainly due to the lower average selling price (ASP) assumptions of US$22–US$25/1K pcs (from US$26.6–US$28 previously), after taking into consideration the latest rubber glove market price and its trajectory. Additionally, we lower installed capacity assumptions by 13%–21% for FY24F–FY25F as Hartalega does not expect any meaningful expansion from 2023 onwards.

• No interim dividend has been declared in this quarter, which is in line with our assumption of 3 sen/share per share in FY23F.

• On a QoQ basis, Hartalega’s 1QFY23 core earnings fell 48%, due to an ASP decline of 15.6% despite flattish sales volume growth. Not helping also are rising operating costs, particularly natural gas, electricity tariff and labour costs. Hartalega does not rule out a potential loss in subsequent quarters in its worstcase scenario.

• While blended ASP for this quarter was US$26.6/1K pcs, we gather that the latest June ASP has declined to US$24/1K pcs and has been dropping further in view of the intense market competition from Chinese players.

• In terms of plant utilisation (PU) rate, Hartalega was running at 69.6% in the quarter and guided that customers are still sitting on high inventories and may only to restock by the end of this year. This does not imply a positive ASP relief as overcapacity is still likely to persist by the end of this year.

• Based on MARGMA’s latest forecast, Malaysian glove prospects may remain tough over the next 6–9 months until 1H2023, whereas Hartalega’s management suggested that oversupply will last until the end of 2023 with no significant new capacities expected in 2023. Meanwhile, new players are exiting and incumbents are deferring/cancelling their expansion plans. Hence we believe a supply-demand equilibrium may be reached by 2024.

• The stock currently trades at premium FY24F PE of 21x, 14% above its 3-year median.

Source: AmInvest Research - 10 Aug 2022