KEY INVESTMENT HIGHLIGHTS

• Maintain NEUTRAL with a revised target price of RM3.29 post the announcement on 2QFY25 financial performance
• 2QFY25 normalised earnings came in at RM42.7m, supported by recognition of deferred tax asset amounting to RM56.1m
• Cumulative 1HFY25 normalised earnings of RM83.1m on track to meet our full year FY25 earnings estimates of RM191.3m
• Current valuation of 46.5x, which is near its two-year mean, indicates that positivity has been priced-in

A balance between opportunity and challenges. We are keeping our NEUTRAL recommendation on Hartalega with a revised target price of RM3.29 from RM2.52 previously. This is in conjunction with the release of the group's 2QFY25 financial results. The results indicated that demand recovery continues to be seen. Nonetheless, we expect competition outside the U.S. to intensify. Excluding the forex impact, the raw material cost remains elevated, which is a concern. There could also be a potential increase in labour costs due to the implementation of minimum wages which could also lead to a revamp in salary structure.

We believe that the commencement of NGC1.5 could partially address some of these concerns. On another note, we view that valuation is rather stretched at this juncture as the stock is trading near its two-year mean of 48.7x.

Lower profit margin. Hartalega's 2QFY25 normalised earnings recorded a profit of RM42.7m, a rebound of +81.4%yoy from RM23.6m.

This was mainly due to the recognition of deferred tax assets amounting to RM56.1m. In the absence of this, the 2QFY25 financial performance would have been loss-making. Note that the impact of ongoing operational efficiencies has been nullified by the rising raw material costs.

This partly led to the +55.6%yoy increase in 2QFY25 operating expenses to RM678.7m.

Track expectation. On a cumulative basis, 1HFY25 normalised earnings adds up to RM83.1m, a reversal from a loss of -RM35.3m achieved for 1HFY24. All in, this came in within expectations, making up 43.4% of our FY25 full year earnings estimates. Note that we anticipate a higher volume moving into 2HFY25 which would translate into stronger earnings as compared to 1HFY25.

Upward revision in target price. We are revising our target price higher to RM3.29 from RM2.52 previously. While there is no change to our EPS assumption, we are attaching a higher PER multiple of 41.9x (previously 32.1x) which is +0.5SD above the five-year mean. We ascribe higher valuation multiple given the more favourable landscape as well as anticipation of better operating efficiency post the commencement of NGC1.5. Note that our target PER is below the current PER of 46.5x.

Source: MIDF Research - 13 Nov 2024