Hartalega Holdings Berhad (Hartalega) could face several challenges next year including volatile sales volume with a shorter order lead
time.
“Its margins may come under pressure if additional costs due to higher raw material and natural gas prices cannot be passed on and restocking activities are expected to resume by 2H 2024,” said Maybank Investment Bank Berhad (Maybank IB).
In its report today (Oct 27), Maybank IB maintains a HOLD call and its earnings forecasts and MYR2.12 TP (on 1.6x CY24E PBV; -1SD).
The research house said the glove manufacturer’s sales volume remains volatile, but price gap has reduces.
“There has been no notable increase in sales, and sales volume remains volatile, with a shorter order lead time as buyers are in no rush to lock in a contract due to excess supply in the glove market.
“The group’s utilization rate remains low at 40-45%. Due to lower raw material and natural gas prices since 2QFY23, the price gap between Malaysian and Chinese glove makers has narrowed to USD2-3 per kpcs (from USD3-4).
“We understand that Malaysian glove makers’ ASP is around USD17-18 per kpcs (China’s USD14-15 per kpcs, excluding tariff). Elsewhere, stock clearance activities could end soon and restocking activities are expected to resume in 2H 2024,” it said.
Maybank IB noted that margins may come under pressure again if additional costs, especially from the expected increase in natural gas prices by 2024, that cannot be passed on.
“Natural gas is the primary energy source for Malaysian glove makers (c.19% of production cost), whereas Chinese and Thailand glove makers use coal or biomass.
“To achieve positive EBITDA or at least breakeven, management will continue to improve on production efficiency and competitiveness following the decommissioning of the Bestari Jaya facilities (BJF),” it said.
The decommissioning of the facilities is on track, slated by around Dec 2023 to Jan 2024.
“Management is currently transferring/shifting manpower and production to its NGC plant. Elsewhere, potential M&A will remain on the medical consumable space, if there is any. Management also has intention to grow its own brand products and distribution businesses in Australia,” Maybank IB noted.
Risk factors for the the research house’s earnings estimates, target price and rating include raw material prices declining faster than ASPs, and higher demand and consumption for gloves from non-healthcare industries post pandemic.
