Can Hartalega’s stellar 1Q results sustain into the coming months?

DESPITE trading at a discount of almost 20% from its target price of RM8.40, MIDF Research has upgraded Hartalega Holdings Bhd to “buy” (from “neutral” previously) on grounds that the company’s fundamentals remain intact regardless of its near-term fluctuation.

Nevertheless, the research house expects the coming quarters to be weaker due to more intense competition which is likely to drive average selling prices (ASPs) lower on a quarter-quarter (qoq) basis.

On top of that, the stubbornly high number of new COVID-19 infections in that led to a more stringent movement restriction could adversely impact its production volume for 2Q FY6/2022.

“That said, we understand that more than 90% of the company’s employees have received their first dose of vaccination which puts the company on track to normalise operations later on,” opined analyst Ng Bei Shan in a results review. “Hence, we expect better utilisation rate and improving operational efficiency in 3Q FY3/2022.”

Yesterday, the Big-Four glove maker announced that it has kicked off its new financial year in a stellar fashion, delivering a record-high net profit of RM2.26 bil for its 1Q FY3/2022 or a 923% year-on-year (yoy) jump (1Q FY3/2021: RM221.06 mil) on the back of a strong revenue growth of RM3.9 bil (1Q FY3/2021: RM920.08 mil).

Moving forward, MIDF Research reckoned that supply and demand will eventually balance out post-pandemic, resulting in a more stable business environment.

“It is possible that glove companies will review their expansion plan to cater to real market demand along the way,” suggested the research house. “The ease in movement of foreign workers post-pandemic will also allow for the company to plan its operations more efficiently.”

Meanwhile, Maybank IB Research seems ‘to have its foot closest to the ground’ by downgrading Hartalega to “hold” (from “buy” previously) with a much lower target price of RM6.74 (from RM9.80 previously).

Note that, the glove maker – like all its peers – are trading close to their 52-week low in recent times.

“1Q FY3/2022 net profit of RM2.3 bil (+1 time qoq; +9.3 times yoy) was in line as we believe the strong earnings performance will not be sustainable as ASP is trending downward since May on lower gloves supply deficit and rising vaccination rates around the world,” opined analyst Wong Wei Sum. “We adjust our FY2022-2024 earnings forecasts by -1.3% to -42%.”

AmResearch also maintained its “hold” call on Hartalega with an unchanged fair value of RM6.87/share after retaining the glove maker’s earnings forecasts as it expects the group to post weaker results in the remaining quarters even after factoring in the Delta variant-driven demand.

“This is due to a combination of production disruption, falling ASP, loss of market share and lack of visibility concerning post-pandemic demand-supply dynamics,” added the research house.

At 10.00am, Hartalega was up 5 sen or 0.74% to RM6.85 with 1.94 million shares traded, thus valuing the company at RM23.48 bil. – Aug 4, 2021

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