Hartalega unlikely to turnaround in near term: “Sell” call on glove maker remains

BIG four glove maker Hartalega Holdings Bhd which has seen its stock price plunged over 70% over the past 52 weeks may not be able to turnaround so soon as its earnings may still be hit by higher energy and electricity costs despite an improvement in plant utilisation rate after December 2022.

While management is trying to raise selling prices to cover part of the higher costs, it may not be successful given the stiff competition and excess supply in the market, according to Maybank IB Research.

“ASP (average selling price) is now at circa US$20/1,000 pieces (below pre-pandemic level) while the management is looking to diversify Hartalega’s income stream by strengthening its distribution business (accounts for 8% of total revenue),” observed analyst Wong Wei Sum in a results review.

“Hartalega is also looking to set up manufacturing facilities outside of Malaysia for risk diversification with efficiency/cost rationalisation exercise on-going.”

Yesterday (Feb 7), Hartalega reported a 3Q FY3/2023 net loss of RM31.9 mil (3Q FY3/2022: RM259.06 mil) which was below Maybank IB Research’s and consensus expectations. This brought the glove maker’s 9M FY3/2023 net earnings to RM84.71 mil or 98.1% lower than the RM3.43 bil achieved in the corresponding financial period last year.

“The management remains cautious on the industry outlook due to stiff competition. Hence, we believe losses will continue over the next quarter at least,” projected the research house.

As such, Maybank IB Research lowered its FY2023-FY2025 earnings forecasts of Hartalega by -15% to -38% with its target price slashed by 25 sen to RM1.18 while retaining a “sell” rating on the company.

Meanwhile, Hong Leong Investment Bank (HLIB) Research concurred that it is still too early to conclude that the industry is recovering from its trough as buyers’ purchasing patterns have remained relatively erratic.

This is despite the glove maker having benefited from plant closures in China due to the lunar new year festivities and the country’s COVID-19 spike in recent times which has rendered an uptick in glove orders, with Hartalega expecting sales volume to be stronger quarter-on-quarter (qoq) in 4Q FY3/2023.

“While Hartalega will also attempt to pass on part of the cost increase to buyers, we do not think that the industry is out of the woods yet as (i) the demand-supply mismatch persists, (ii) ASP revision likely to be small, and (iii) costs are expected to increase further (mainly fuel costs and electricity costs),” opined analyst Sophie Chua Siu Li.

All in all, HLIB Research also maintained its “sell” call on Hartalega with a lower target price of RM1.28 (from RM1.48 previously).

At 10.36am, Hartalega was down 2 sen or 1.27% to RM1.56 with 6.02 million shares traded, thus valuing the company at RM5.35 bil. – Feb 8, 2023

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