Review

• Hartalega’s 1HFY25 earnings of RM53.1mn accounted for 24.5% of our full-year forecasts and 32.3% of consensus estimates. However, we consider this as within expectations as FY25 earnings are expected to be back-end loaded with higher ASP and volumes.

• 1HFY25 earnings turnaround on the back of higher revenue and improved production efficiency. Revenue surged 38.5% to RM1.2bn underpinned by volume growth of 43.9%, which resulted in 0.5%-pts rise in PBT margin due to enhanced productivity.

• QoQ, 2QFY25 LBT stood at RM47.5mn compared to a PBT of RM41.1mn a quarter ago. The weaker performance was due to higher operating cost from ramping up of new production lines and drastic appreciation of Ringgit against the USD. For this quarter, we gathered that shipments of about 450mn gloves were delayed amid global shipping constraints.

• Positively, 2QFY25 core net profit was stronger at RM28.8mn compared to RM24.3m in 1QFY25 due to: i) higher sales volume of 15.5% and ii) recognition of deferred tax assets. Overall, the plant utilisation rate improved to 90% (vs. 78.0% in 2QFY24).

• For this quarter, the company declared a first interim dividend of 0.56sen/share, which will be payable on 11 December 2024.

Impact

• No change to our earnings estimates.

Outlook

• Going into 3QFY25, we expect ASP to increase by USD1-2 per 1000 gloves due to the cost-pass through mechanism and higher demand from US customers due to some switching orders for medical gloves ahead of US tariff. Additionally, we believe that sales volumes would improve by c. 9.2% QoQ as customers are expected to continue replenishing inventory.

• Regarding its expansion plan, Hartalega has commenced operations for up to 10 production lines (c. 5bn gloves per annum) in Plant 8. Notably, this is ahead of its target to expand the total installed capacity to 37bn gloves per annum by the end of FY25. Moving forward, we believe that more production lines will be gradually added, given the group’s current high utilisation rate of around 90%.

Valuation

• We maintain our Buy recommendation on Hartalega with a higher TP of RM3.98/share (from RM3.00) based on 2.7x FY26 P/B and 3% ESG premium.

Source: TA Research - 13 Nov 2024