Hartalega’s announcement of the shutdown of the Bestari Jaya manufacturing plant is anticipated to close down four manufacturing facilities with 40 production lines by the end of CY2023 with total production capacity reduced from 44b gloves to 31b gloves. The news did not go well with analysts, with MIDF as it signals a challenging near-to-middle-term outlook for the gloves sector due to the ongoing oversupply of glove situation.
Moreover, the impairment loss of RM347m for FY23F and provision for retrenchment costs and contract obligation expenses of RM70m for FY24F will further raise input costs and compress margins. While the reduction in production capacity to improve utilization rates, the continuous oversupply of gloves will likely limit any improvements.
However, the house is positive from the long-term perspective as the decommissioning of less efficient production plants is anticipated to reduce operating and depreciation costs, which would then lead to improved operational efficiency. Note that the Bestari Jaya plant, as compared to the NGC, is less efficient, constrained by outdated technology, and generates greater energy, labour, and maintenance expenses. This was due to the age of the facility. While the oversupply of gloves in the market remains a concern in the near-to-middle term outlook, we believe the decommissioning may increase cost effectiveness and competitiveness in the long-term.
Based on this MIDF is revising the earnings projections for FY23F-25F with a lowered forecasts by 34.7%/ -131.5%/- 70.8% to reflect the challenging near-to-midterm outlook. This was after factoring in a low average selling price (ASP), reduced
total production capacity, and lower sales volume. As such, the house expects a net loss in the final quarter of FY23F, and a net loss for FY24F.
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