Investment Highlights

• We upgrade Hartalega to BUY from HOLD with an unchanged fair value of RM3.20/share as its share price has declined by 31% over the past 3 months. Our fair value is based on CY25F target PE of 30x (0.25x standard deviation (SD) above the 10-year average of 27x) and a 3% premium for an ESG rating of 4 stars.

• Although Hartalega’s 1QFY25 core net profit (CNP) o RM37mil (after excluding inventories write-offs of RM5mil and unrealised forex gain) accounted for only 18% of our full-yea core net profit forecast and 19% of street’s estimate, w consider the group’s results to be in line. We think tha 2QFY25 earnings onwards would be stronger due to highe sales volume.

• Global glove demand has been unexciting post-pandemic due to supply chain stock adjustments and excess stockpiles However, there were signs of demand improvement in early 2024 as stockpiles continued to deplete. Recovery in marke demand is expected to continue in 2H2024 and 1H2025.

• No dividends were declared in 1QFY25 even though Hartalega posted a strong net cash position of RM1.3bil.

• QoQ, sales volume rose 6% to 5.9bil pcs in 1QFY25 from 5.4b pcs in 4QFY24, driving net profit to RM37mil from RM21mil in the previous quarter. 1QFYQ25 pretax margin almos doubled QoQ to 7% due to lower net interest income (-8% QoQ).

• There was a 12% YoY increase in operating costs to RM520mi in 1QFY25 from RM466mil in 1QFY24. This was partly due to increased raw material and natural gas prices.

• Hartalega’s 1QFY25 blended ASP inched up to US$21.4/1K pcs (+4% QoQ) from US$20.2/1K in 4QFY24.

• We project Hartalega’s FY25F earnings to be stronger underpinned by:
  
  i) higher order pipeline from the commencement o inventory replenishment cycle, and
  
  ii) lower cost structure from the decommissioning of Bestar Jaya plant.

• Hartalega is currently trading at a FY26F PE of 28x, below its pre-pandemic FY18-FY19 average of 34x

Source: AmInvest Research - 7 Aug 2024