AS the Employees Provident Fund (EPF) seems to be inching closer by the day to giving up its ‘crown’ as a substantial shareholder of Hartalega Holdings Bhd, the Big-Four glove maker has been dealt another blow with CGS-CIMB Research downgrading its stock to “reduce” (from “hold” previously) while slashing its target price by more than half to RM2.30 (from RM4.70).
This follows the company’s dismal 1Q FY3/2023 core net profit of RM88.3 mil (-96.1% year-on-year [yoy]) in view of the lower-than-expected average selling prices (ASPs) amid supply glut in the global glove sector.
“Due to the current weak operating environment in the glove sector, we expect Hartalega to post sequentially lower earnings in the next three quarters,” projected analyst Walter Aw in a results review.
Elaborating further, CGS-CIMB Research observed that global glove demand is currently “still weak” with customers keeping low inventory levels.
“In addition, there is an abundance of supply in the market; we gather that glove makers, especially from China, are lowering their ASPs to be competitive in the market,” revealed the research house.
“As such, we expect Malaysian glove makers including Hartalega to lower their ASPs to remain competitive in the near term. Nevertheless, we expect Hartalega’s ASPs to stabilise by 3Q FY3/2023F at US$22-US$24 (per 1,000 glove pieces) from US$26-US$27 at 1Q FY3/2023.”
In a Bursa Malaysia filing yesterday (Aug 9), EPF notified that it had disposed of a massive 4.87 million Hartalega shares on Aug 4 which brings its direct interest in the company to 7.056% – a mere 2% away from the 5% threshold substantial shareholding threshold.
Sharing a similar bleak outlook as CGS-CIMB Research is Maybank IB Research which reiterated its “sell” rating on Hartalega while further lowering its target price to RM1.86 (from RM2.48 previously).
“The management has turned more bearish on ASP trend due to stiff competition,” commented analyst Wong Wei Sum. “The commissioning of the NGC1.5 plant 8-11 will be dependent on market condition while the NGC2.0 plant expansion will be put on hold (NGC = Next Generation Integrated Glove Manufacturing Complex).”
Moving forward, Maybank IB Research said it has also lowered its FY2023/2024/2025 earnings forecasts of Hartalega by -39%/-49%/-16% to factor in (i) lower utilisation rates of 55%/60% (from 70%) for FY2023/2024; and (ii) lower FY2024/2025 ASP assumptions to US$22/1,000 glove pieces (from US$23) while maintaining the US$23 price tag for FY2023.
As of end-June 2022, Hartalega had RM1.8 bil net cash (which is equivalent to 53 sen/share).
At 9.21am, Hartalega was down 9 sen or 3.21% to RM2.71 with 1.02 million shares traded, thus valuing the company at RM9.29 bil. – Aug 10, 2022
