Hartalega Holdings Berhad - Unexpected miss and gloomy outlook
Wed, 19-Feb-2025 06:59 am
by Chelsea Chew • Apex Research

Counter

HARTA (5168)

Target Price (RM)

3.560

Recommendation

Buy

Summary

  • HARTA’s 3QFY25 core net profit jumped 76.8% yoy and 13.0% qoq to RM29.3m, bringing 9MFY25 core net profit at RM88.9m, which came below expectations, accounted to 56.5% and 45.4% of ours and consensus expectations respectively.

  • Factoring the higher-than-expected operating expenses and softening order volume and ASP, we adjust our FY25F/FY26F CNP forecast lower by -55.4%/-17.3% to RM100.7m/RM161.3m.

  • Following weakness in share price, we upgrade to BUY recommendation with a lower target price of RM3.56 (from RM3.64), based on 2.2x P/B multiple pegged to FY27F BVPS of 1.62.

 

Results below expectations. Hartalega’s (HARTA) 9MFY25 core net profit of RM88.9m, turnaround from core net loss of RM5.3m in 9MFY24 came in below expectations. This compares to our full-year forecast of RM156.5m core net profit and the street's expectations of RM183.7m, representing 56.5% and 45.4% of our and street projections, respectively.

 

YoY. Excluding several extraordinary items (including RM30.3m unrealised forex gain, an RM40m derivative loss, and RM4.6m reversal allowance for inventories), HARTA reported a 13% qoq improvement in core net profit, totalling RM29.3m in 3QFY25, core net profit expanded 76.8% yoy to RM29.3m, driven by by higher orders from US customers, who placed orders upfront in anticipation of a price hike following the announcement of the US tariff on Chinese glovemakers in Sep 2024. Revenue for the quarter 77.6% yoy to RM738.2m, primarily on the stock replenishment activity and higher purchases in anticipation of higher tariffs.

 

QoQ. HARTA reported a 13% qoq improvement in core net profit at RM29.3m, due to higher revenue (+13.2% qoq) from a 12% qoq increase in sales volume due to frontloading purchases going on in US customers, despite a 300m pieces gloves shipment delay due to port congestion issues. However, this delayed shipment was carried over to the March quarter (4QFY25) and successfully shipped out. Although Blended ASP(USD) increased by 3% qoq to USD 22/1,000 pcs in 3QFY25, but took a deep cut when translated back lower in (MYR) due to unfavourable forex. 

 

Outlook. The glove industry is currently experiencing an oversupply situation. The outlook for the upcoming quarter is bleak due to several factors: (a) Upfront purchases from US customers currently taking place may reduce the order volume in the next two quarters. (b) China is selling at a lower ASP in non-US markets to fully utilise its production capacity, with a price point of USD15 compared to USD16-20 for manufacturers in Malaysia. (c) Limitations on foreign worker quotas are pushing glove manufacturers to hire pricier local employees. The latest government cap on foreign workers is set at 2.5m, leaving ~ 90k available positions as of Nov 2024. (d) Higher-than-expected costs are anticipated, including increased personnel expenses and ramp-up in costs for the NGC1.5 Plant 8. (e) The EPF contribution for foreign workers is still under discussion, with the current 2% contribution still having negligible impact. (f) Lastly, the 10% global tariff imposed by Trump is not a significant concern for HARTA, as HARTA can pass this cost onto its customers.

 

Risk from Chinese players. Should demand for gloves increases, China could potentially flood 30bn production capacity plant in ASEAN countries, mainly in Indonesia and Cambodia, to cater to the US market. However, plans are far from concrete.

 

Earnings Revision. We factor in the higher-than-expected operating expenses and softer ASP amid the challenging operating landscape. Following these changes, we adjust our FY25F/FY26F earnings forecast lower by -55.4%/-17.3% to RM100.7m/RM161.3m to align the ASP with management guidance for 4QFY25. Additionally, we are introducing FY27F earnings of RM179.6m. Assuming no further capacity additions in the market and with economic recovery in key markets (US, Europe, and Southeast Asia), the glove sector is expected to reach market equilibrium by 2026 or beyond.

 

Valuation. Despite reducing our earnings expectations, we are upgrading our recommendation on HARTA to BUY with a revised target price of RM3.56 (down from RM3.64) following a recent pullback in share prices. This is based on a 2.2x price-to-book multiple applied to the FY27F BVPS of 1.62, with no ESG premium or discount factored in, given its three-star ESG rating. The P/B ratio is applied fairly as before the pandemic, HARTA’s Book Value per share was at RM 1.11 with a 6.0x P/B ratio; the current P/B ratio is undervalued; we command 37% discount from 2018’s P/B ratio as the Chinese glovemakers enter the market during a pandemic.  

 

Risk. Volatility in raw material prices and currency exchange rates will impact ASPs and margins.

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