LIMITED share price upside – coupled with the imposition of cukai makmur a.k.a prosperity tax – are expected to deal a cruel blow to prospects of Hartalega Holdings Bhd, prompting PublicInvest Research to downgrade the Big Four glove maker’s rating to “neutral” (from “outperform” previously).
In releasing its 3Q FY2021 results yesterday (Nov 2), the management of Hartalega has cautioned that the prosperity tax announced in Budget 2022 could materially impact its bottom line in 2H FY2022.
This is because Hartalega’s year of tax assessment for 2022 falls during the period of April 1, 2021 to March 31, 2022 which is the most profitable period for most of the glove players.
The additional tax bill is estimated at about RM400 mil.
“We still deem Hartalega’s performance to be in line with our projections although we expect weaker quarters ahead, reflecting the effects of a lower utilisation rate and softening average selling prices (ASPs),” opined the research house in a results review.
“We lower our forecasts for FY2022-2024F by 1-24% on account of these and to also account for the recently-proposed cukai makmur in the Budget 2022 announcement.”
Aside from rating, PublicInvest Research has also lowered Hartalega’s target price to RM6.13 from RM7.80 previously.
For its 2Q FY3/2022, Hartalega’s 2Q FY2022 revenue dropped by 49% quarter-on-quarter (qoq) to RM2.01 bil due to lower sales volume (-34% qoq) and lower ASPs (-27% qoq).
The company’s net profit has consequently declined by 60% to RM913.3 mil in tandem with the lower sales revenue.
Weaker sales volume has been attributed to (i) buyer caution in view of declining selling prices and (ii) the implementation of the enhanced movement control order (EMCO) in Selangor as well as the National Recovery Plan (NRP) which saw companies only allowed to operate with 60% workforce.
Meanwhile, the lower ASPs was mainly due to increased competition from Malaysia, China and Thailand which has created pricing pressures. Net profit margin was further affected by higher raw material cost while utilisation rate fell to 63% from 88% in 1Q FY3/2022 as a result of the workforce restrictions and oversupply issues.
Elsewhere, Maybank IB Research remains bearish on Hartalega’s prospects as evident by its reiterating its “sell” call on the stock with an unchanged target price of RM4.
“We raise our FY3/2022 earnings forecasts by +11% to factor in higher exchange rate of RM4.15/US$ (from RM4.10/US$) and utilisation rate of 75% (from 72%) in FY3/2022 while maintaining our FY2022/2023/2024 ASP assumptions of US$61/US$24/US$23 per 1,000 glove pieces,” projected analyst Wong Wei Sum.
“Nevertheless, we have not factored in the prosperity tax which would then lower our new FY2022 net profit by -2%.”
At 9.34am, Hartalega was up 21 sen or 3.65% to RM5.95 with 1.25 million shares traded, thus valuing the company at RM20.43 bil. – Nov 3, 2021
