Hartalega Holdings Berhad reported a core PATANCI of RM110.1m (excluding a one-time off an item +RM29.1m) in 1QFY22. It came in below our and streets’ estimation, accounting for 17.4% and 18.8% of the full-year FY23 earnings projection respectively. The negative deviation was mainly due to lower-than expected ASPs and a higher-than-anticipated rise in energy costs. There was no dividend announced this quarter.
Weaker earnings and revenue. Hartalega’s 1QFY23 revenue plunged by -78.3%yoy to RM845.7m. The lower revenue was owing to normalising of the ASPs of gloves (USD/1000pcs) (-70.6%yoy) along with a lower sales volume (-27.2%yoy). Similarly, core PATANCI shrunk to RM110.1m (-95.1%yoy), due to higher energy (+15.3%yoy) and labour cost (+5.4%yoy). This was following increase in natural gas tariffs and a minimum wage hike to RM1,500. Operating profit margin decreased by – 55ppt to 18% due to higher input cost. On a sequential basis, the group’s 1QFY23 topline and operating profit were lower at RM845.7m (- 12.7%qoq) and RM152.6 (-26.2%qoq). The operating margin narrowed by -3ppt to 18.0%.
In view of the latest earnings result, MIDF has revised the glove maker’s FY23-24 earnings estimate by -29.1%/-
19.6%. This is after factoring in a stagnant total capacity of 42b pieces of gloves for FY23/24F as highlighted by the
management. The research house is also cutting the ASP assumptions for FY23/24F to an average of USD23.5/USD24 per 1000 pieces of gloves, slightly above pre-pandemic levels of USD21-23/1000pcs.
MIDF maintains NEUTRAL on the stock with a lower TP of RM2.58 (from RM3.09). The target price is based on 16.1x PER (close to its 2-years historical average) on FY24F EPS of 16.1sen. The dividend yield is estimated at 2.8%. It believes the pricing and margin compression will continue in FY23 due to weaker demand from customers because of overstocking and subsequent inventory modification, as well as intense competition in the global glove industry.
The solid balance sheet of Hartalega, which makes up 25.6% of its market capitalisation in net cash, could provide a cushion against market volatility. Downside risks are faster-than-anticipated decrease in ASP to below break-even level, and rapid depreciation in the value of the USD, which might reduce export sales that are denominated in USD. The company’s FY23F PER of 13.1x is trading below its historical 2-year average of 15.3x. We believe the discount is justified given the challenging operating environment and declining ASPs possess a downside risk to its earnings.
