Hartalega Bhd remains cautious on the sector outlook despite above-expectations result but it has turned more positive and expects a better 2HFY24, according to research houses.
Maybank Investment Bank Bhd (Maybank IB), in its research note today (Nov 8) said the group expects better results for the second half of 2024 on better cost efficiency and utilisation rate (UR) post the decommissioning of Bestari Jaya Facilities (BJF).
“The group now expects to recover by the end of 2024,” it said.
The research house, however, maintains its HOLD call, and raised its FY24-26 earnings forecasts, with valuation at RM2.25, up by 13 sen on unchanged 1.6x CY25E PBV as we roll over our base year for valuation.
“We now expect Hartalega to report a core net profit of MYR21 million in FY24, previously RM7 million core net loss, and higher net profit in FY25 (+43%) and FY26 (+30%), respectively.
“(This is) after lowering our raw material cost estimates by 5 to 6%, assuming a higher plant utilisation rate of between 75% and 80% in FY25/26 from between 70% and 75%, on 33b pcs p.a. capacity) but maintaining 49% utilisation rate for FY24.
“We also assume a RM4.60/USD average from RM4.50). Balance sheet remains strong as at end-Sep 2023 with RM1.5 billion in net cash (MYR0.44/sh),” it said post con-call with Hartalega.
The research house also pointed out that average selling price (ASP) is likely to trend downward in the upcoming quarters due to stiff competition.
“However, due to a lower price gap offered by its China counterparts, sales volume is expected to improve. UR is likely to increase to between 45 and 50% in 2HFY24, from 44% in 2QFY24.”
Besides that, the Bestari Jaya Facilities decommissioning (BJFD) is slated for completion by mid-Jan 2024, and the group may reverse some of the provisions related to BJFD, Maybank IB added.
“Focus remains on sales volume, instead of profit margin as well as cost savings and efficiency gains from the BJFD will help to defend its operating margin if the group fails to pass on the higher raw material costs.
“The group will commence operation of NGC1.5 (+10b pcs p.a.) when NGC1.0’s utilisation rate hits 80%,” it said.
Meawhile, Kenanga Research is slightly more positive on glove maker’s outlook at the back of its 1HFY24 results, with a narrower-than-expected net loss of RM25 million compared to its full-year net loss forecast of RM105 million.
“The results beat our forecast but only met market expectation. It returned to the black in 2QFY24, thanks largely to lower input costs. It acknowledged that demand visibility is still lacking at present.
“We now project a RM42 million net profit in FY24F, from a RM105 million loss and raise our FY25F net profit by 92%,” it said in its Results Note today.
It added it now assume a higher EBITDA margin of 11% (previously 2%) due to lower-than-expected input raw material and natural gas prices.
Kenanga, therefore, reiterates its MARKET PERFORM call and lift our TP by 26% to RM2.33 from RM1.85, with no adjustment to TP based on 3-star ESG rating.
“This is based on 1.7 times FY25F (previously 1.4 times and based on FY24F), in line with the sector’s average of 1.7 times charted during previous downturns in 2008−2011 and 2014−2015.
“We roll over our valuation from FY24F to FY25F and removed the 20% discount to sector’s average down-cycle valuation since HARTA has demonstrated a more disciplined production capacity cut at 32% compared to peers of 10%-12%,” it said post-briefing.
It added: “We expect the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply.
“Nevertheless, we expect the oversupply situation to be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective plants.
Kenanga said we project the demand for gloves to rise by 15% in 2023, which is consistent with Malaysian Rubber Glove Manufacturers Association’s (MARGMA) forecast.
“This will result in an excess capacity of 112b pieces which is similar to CY22. Despite the improvement, the overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry,” it added.
