RHB Investment Bank (RHB IB) upgraded its call on Hartalega Holdings Bhd (Hartalega) to BUY from Neutral at the back of recent robust export data that potentially suggests a positive sign of demand recovery.
“(This also) coincides with steady average selling price (ASP) performance. Moving forward, we expect the improvement in demand visibility, coupled with a favourable cost outlook in 2024, to propel glovemakers’ profitability,” it added in its Malaysia Company Update today (Jan 5).
The research house also increased its TP by 64% to RM3.25 from RM2.22, 14% upside, which incorporated a 2% ESG discount, as the group ESG score is below the 3.0 country median.
RHB IB also raises FY24F-25F (Mar) earnings to between RM175 million and RM294 million from between RM147 million and RM191 million – taking into account of the better demand visibility and improving plant utilisation rate.
“Our WACC is lowered 7% from 8% after we trim our cost of equity to 9% from 10% previously. Our DCF-derived TP represents 28x FY25F P/E, ie above HART’s pre Covid-19 5-year mean of 27x,” it said.
Elaborating on the reasons behind the upgrade, it said Malaysia’s monthly glove exports has remained on a positive year-on-year (YoY) growth trend for two consecutive months following a 2% YoY increase last November, and 33% increase in October.
“Despite export volumes contracting 25% on a month-on-month (MoM) basis, the export value was 1% MoM higher in November.
“We believe this is may indicate a cost pass-throughs starting to kick-in and a better product mix in November. On this front, we
believe the ability to initiate cost pass-throughs will serve as a crucial catalyst to drive profitability moving forward.
“It also indicates risks from a price war has gradually dissipated,” it siad.
Based on its channel checks, RHB IB said Malaysian glovemakers sold at USD19-20 per 1,000 pieces in December, largely unchanged compared to 3Q23.
“While Malaysian glovemakers suffered weaker ASPs in 3Q23 (down by 3 to 7% QoQ), we think the pick-up in export value could substantiate the management teams’ guidance and our expectations of a stabilised ASP trend that could gradually materialise in 2024,” it said.
RHB has also increased its 2024 industry supply assumption to 376 billion compared to 2023’s 373 billion, taking into account 1 billion in new capacity from Thailand and Hartalega’s progressive capacity transition plan (estimated at 2 billion from the New Generation Complex or NGC’s 1.5 billion).
“Malaysian glovemakers have yet to announce any plans to commence new capacities in 2024, given that domestic industry plant utilisation is still running below 50%.
“(Additionally, we raised our 2024 demand assumptions to 397 billion from 386 billion previously, which indicates a 7% YoY growth from 4% growth previously.
“This is in comparison with the pre-Covid-19 5-year average growth of 14%. That said, we expect the industry to achieve equilibrium by 2H24, as the bulk inventory stockpiled since 2020-2021 has been gradually consumed and is approaching shelf-life end, typically in 3 to 5 years),” it added/
The risks to its call include drop in glove ASPs, slower-than-expected capacity expansions, lower-than-expected utilisation rates, and higher-than-expected raw material prices.
