Hartalega Holdings Berhad - Initial signs of gloves demand recovery
Wed, 13-Nov-2024 07:36 am
by Chelsea Chew • Apex Research

Counter

HARTA (5168)

Target Price (RM)

3.64

Recommendation

Buy

Summary

  • 2QFY25 core net profit to RM43.4m (+99.4% yoy, +8.9% qoq), bringing 1HFY25 core net profit at RM83.2m (+207.0% yoy), which is deemed in line with ours and consensus expectations of RM156.3m and RM164.5m respectively.

  • Earnings recovery will be supported by expectations of gradual improvement in demand as several key consumption regions began to engage in restocking activities.

  • Downgrade to HOLD recommendation on HARTA, but with a higher target price of RM3.64 based on 2.5x pegged to FY26F BV of RM1.46. 

 

Company Update

  • Results review. 2QFY25 core net profit surged 99.4% yoy and 8.9% qoq, reaching RM43.4m, driven by a 16% qoq increase in sales volume and higher USD-denominated ASP, which offset a c.3% lower in MYR-denominated ASP. Revenue for the quarter rose by 44.2% yoy to RM652.1m, credited to robust sales volume and a marginal increase in ASP (USD).

     

  • Dividend declaration. In this quarter HARTA has declared a first interim single-tier dividend of 0.56sen per share, payable on 11 December 2024. The entitlement date has been set for 27 November 2024.

     

  • Results deemed within expectations. 6MFY25 core net profit of RM83.2m (+207.0% yoy) remained in positive territory, is deemed within both our/consensus expectations of RM156.3m/ RM164.5m respectively. We gather that earnings recovery was largely supported by reinvestment allowance on capital investment domestic expansion project, which offset higher operating cost and forex losses. 

     

  • Operations Highlights. In 2QFY25, HARTA’s utilisation rate improved from 75% to 90%, driven by production line consolidation in more advanced NGC plants. Monthly production of 2.3bn pcs exceeded HARTA’s target of 2.1-2.2bn pcs during the quarter. Looking ahead, utilisation rate is expected to remain at c.75%-85% upon NGC 1.5 coming online. This could further increase HARTA’s capacity to 2.3bn-2.4bn pcs/month, which is deemed timely to leverage onto better market dynamics. 

     

  • Meanwhile, global shipping constraints have led to a delay in c.450m pcs of shipments end-Sep 24. However, these delayed goods are expected to be shipped out soon.

     

  • Industry Highlights. We gather that, nitrile raw material costs increased by c.5-6% qoq. We foresee raw material prices to remain elevated in the next quarter, due to rising material shipping costs and heavy rainfall elevating NR Latex prices. In contrast, natural gas and feedstock prices should stabilise amid lower demand.

     

  • Malaysia’s glove export volume increased from RM11.8bn in CY23 to RM13.7bn in 11M24, implying that the demand for gloves is on a recovery trend, which provide some alleviation towards the oversupply condition. Despite near-term obstacles, long-term prospects are bright, driven by the customers who prioritise gloves of a higher quality level, seeing that the market’s ASP have now normalised.

     

  • Outlook. We expect a gradual recovery in the upcoming quarters, driven by the impact of c.50% tariff hikes on Chinese manufacturers impact effective late-Oct 24. Several HARTA’s customers have inquired about a consistent supply, which is likely to support demand. Furthermore, we believe ASP is expected to stabilise c.USD22/1,000pcs (vs Chinese players, which may vary by +/- USD1-1.5). The NGC 1.5 expansion product should help HARTA achieve its aim of increasing current capacity to c.37bn pcs gloves/pa by end-FY25.  Moving forward, we expect higher personnel costs due to minimum wages in Malaysia and levies on foreign workers, of which HARTA will adopt the cost-pass-through mechanism to customers. We foresee HARTA transferring WIP to assets and generating more sales to offset operational costs, positioning itself well for market recovery.

     

  • Valuation. Keeping our core net profit forecast for FY25F at RM156.5m, but raised our FY26F core net profit by 4.1% to RM189.2m, to adjust for slight bump in EBITDA margin and higher utilisation rate of 75%. Upward revision is further supported by the stock replenishment in key consumption regions and the tariffs imposed on China manufacturers, which will lead consumers to consider alternative (Malaysia) suppliers. Following the share price appreciation, we downgrade HARTA to HOLD recommendation, but with a higher target price of RM3.64. This is based on revised 2.5x BV multiple, with a 4% premium on current BV (2.4x).

     

  • Risk. Volatility in feedstock cost and swifter-than-expected recovery in ASP, along with exposure to foreign exchange risk and volatile purchasing patterns.

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