AMID anticipation of weaker quarters that stem from lower sales volume, MIDF Research has downgraded Hartalega Holdings Bhd to “neutral” (from “buy” previously) while slashing the glove maker’s target price by 27% to RM5.88 (from RM8.03 previously).
According to the research house, Hartalega posted a significant 71% quarter-on-quarter (qoq) and 73.7% year-on-year (yoy) decline its net profit for 3Q FY3/2022 ended Dec 31, 2021 to RM263.5 mil while the company’s revenue dipped by -50.0% qoq to RM1 bil due to a 44% qoq decrease in average selling price (ASP) from 2Q FY3/2022.
For the cumulative nine-month period, however, Hartalega’s net profit of RM3.45 bil was above MIDF Research’s and consensus expectations at 96.1% and 97.1% of respective full-year estimates. The company’s 9M FY3/2022 revenue and pre-tax profit recorded an increase of +57.4% yoy and +92.0% yoy respectively.
“The ASP decline was attributable to the increased supply from major and new glove makers,” justified the research house in a results review.
“Sales volume has also dropped by -17% qoq from 2Q FY3/2022 as customers continued to adjust inventories due to declining ASP coupled with logistic issues such as capacity constraints on vessels (with circa 1 billion glove pieces being held up in the port).”
While there has been a decline in raw material costs, MIDF Research observed that this has been slower compared to the decrease in ASP. “Profit margin was also affected by the lower utilisation rate of 52% compared to 63% in the previous quarter,” added MIDF Research.
In conjunction with the release of its quarterly results, Hartalega has declared an interim dividend of 14.8sen/share which brings its 9M FY3/2022 dividend pay-out to 69.8 sen/share.
Meanwhile, CGS-CIMB Research expects Hartalega to record losses in 4Q FY3/2022F due to lower ASPs and the RM375 mil impact from prosperity tax.
“We lower FY3/2022-3/2024F EPS (earnings per share) to account for lower ASPs and sales volume,” noted analyst Walter Aw. “Hence, our target price falls to RM5.80 (28 times CY2023F price-to-earnings ratio).”
While it likes Hartalega for its (i) leading manufacturing technology in the nitrile space among peers; (ii) strong balance sheet (net cash of RM2.8 bil); and (iii) higher margins vs peers (past five-year average), the company’s earnings prospects are likely to remain weak in the near-term with limited upside potential, added CGS-CIMB Research.
At 9.42am, Hartalega was down 28 sen or 6.03% to RM5.29 with 3.99 million shares traded, thus valuing the company at RM18.13 bil. – Feb 9, 2022
