Research houses have mixed opinions on the outlook and prospects for glovemaker Hartalega Holdings Bhd, as it is facing challenges in its journey to recovery from losses in the last financial year.
CGS-CIMB and Kenanga Research anticipated that operating environment for the group to stay tough, on different reasons including the ongoing average selling price (ASP) and sales volumes pressure, the Red Sea crisis as well as massive oversupply.
In its Company Note, CGS-CIMB said Hartalega’s financial results for third quarter ended Dec 31, 2024 (3QFY24) beat its Bloomberg consensus’ estimates as it posted a core net profit of RM20.2 million, down 21% quarter-on-quarter (QoQ).
However, it is a swing from losses year-on-year (YoY). In the previous corresponding quarter, the glove maker made a net loss of RM31.91 million.
“The sequential weakness was attributed to weaker ASP and sales volumes, a decline of 3% quarter-on-quarter (QoQ) to 4.5 billion pieces (pcs), with the former tracking the decline in raw material prices.
“The latter was partially attributed to deferred shipments of 600 million pcs arising from the ongoing Red Sea crisis,” it said.
The YoY improvement, however, was due to expanded margins instead of ASP and volume recovery, as the group’s cost optimisation initiatives have started to bear fruit, the research house said.
“Earnings before interest, taxes, depreciation, and amortization (EBITDA) margin held up at 11.4% during 3QFY3/24, down marginally from 11.6% in 2QFY24.
It raised its FY24F earnings per share (EPS) for 199% as it factor in higher EBITDA per 1,000 pcs of US$2.06, from US$1.51 previously.
“However, we maintain our FY25-26F estimates, as we have already factored in some degree of recovery in sales volumes and profitability
for the group in FY25 to FY26F.
“In the medium term, we expect the oversupply situation to persist despite signs of gradual restocking by key customers in developed markets.
“As such, we believe any upside to pricing and profitability would likely be capped as these excess idle capacities can easily be turned on. Our FY25F EPS growth of 94% has already factored in 11% sales volumes growth and recovery in EBITDA per 1,000 pcs to US$2.65,” it said.
Consequently, CGS-CIMB reiterated REDUCE call on Hartalega with an unchanged target price (TP) of RM1.95, based on 1.4x FY25F (price-to-book-value) PBV (at -1.s.d. of its FY11 to FY19 average).
“This is as we think the market has already ascribed a distant recovery to the stock, 30.3x FY26F price-earning ratio (P/E), and see greater downside risks to its current valuations should the group fail to deliver amid ongoing industry competition.
“We see greater downside risks to its current valuations should the group fail to deliver amid ongoing industry competition,” it added.
Similarly, Kenanga said Hartalega’s operating environment will be tough, plagued by massive oversupply and estimated that the the demand-supply situation will only start to head towards equilibrium in CY26.
Malaysian Rubber Glove Manufacturers Association (MARGMA) projects 12% to 15% growth in the global demand for rubber gloves annually from CY23, following an estimated 25% contraction to 300 billion pieces in CY23.
Kenanga projects the demand for gloves to rise by 30% in CY24 to 390 billion pieces, due to a low base effect in CY23, and resume its organic growth of 15% thereafter.
“This will result in an excess capacity of 212 billion pieces in CY24. The overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry in CY24,” said in its Company Update today.
The research house said Hartalega 9MFY24 results met expectations, despite registering a cumulative net loss of RM2 million, as it expect a bumper 4Q.
“This is based on assuming that profit held back in 3Q by shipment delays due to heightened geo-political tensions in the Red Sea will be booked in 4Q, coupled with improving orders and cost savings emanating from the decommissioning of its Bestari Jaya facility.”
Kenanga said post-briefing with Hartalega, the group guided for an orders uptick in FY25, underpinned largely by restocking activities.
However, it believes that the recovery in its quarterly sales will remain bumpy as buyers see little need and urgency to place sizeable orders or hold substantial stocks as supply is plentiful and readily available in the market.
“Aside from that, with a low industry utilisation of about 40%, we believe any attempt to hike selling prices would likely backfire,” it added.
The research house said its current valuations are unjustified by the lukewarm recovery.
Consequently, it maintained forecasts but downgraded its call to UNDERPERFORM from MARKET PERFORM as we believe its share price has ran up prematurely.
“We also keep our TP at RM2.33 based on 1.7x FY25F BV, in line with the sector’s average PBV of 1.7x charted during previous downturns in 2008 to 2011 and 2014 to 2015.
“There is no adjustment to TP based on ESG given a 3-star rating as appraised by us. At more 100x forward PER and forward return-on-equity (ROE) of only 1% to 2%, its valuations are lofty despite the improved outlook,” it said.
On the other hand, RHB Investment Bank (RHB IB) is more optimistic than CGS-CIMB and Kenanga, maintaining a bullish stance on Hartalega.
“This is underpinned by improvements in market dynamics the second half of 2024 (by 2HCY24) and operating efficiencies (post decommissioning exercise) and a gradual easing in raw material costs,” it said in its Malaysia Company Update today.
It lowered its FY24F and FY25F earnings by 64% and 30% respectively to account for weaker-than-expected volumes and less-aggressive ASP hikes moving forward. Its FY24 sales volume assumption takes into consideration the 600 million in backlog orders, which will be recognised by 4QFY24.
RHB IB maintained its BUY call but lowered the discounted cash flow (DCF)-TP to RM3 from RM3.25, which implies 25x FY26F P/E, slightly below the pre-COVID-19 5-year historical mean of 26x, post the earnings adjustment.
“Our TP incorporates a 2% discount, as Hartalega’s ESG score of 2.9 is below the 3.0 country median.”
The research house said the decline of core net profit QOQ, brought 9MFY24 numbers to account for 17% and 63% of its and Street’s expectations.
“The weaker-than-expected performance was on one-off logistical challenges arising from the Red Sea crisis and softer ASPs. The QoQ drag of earnings was the shipment delay of 600 million pcs of gloves.
“Nevertheless, Hartalega fulfilled its shipments by January and no orders were cancelled. Clients also did not revert to its competitors,” it said.
RHB IB believed the worst is over for Hartalega, as glove makers’ profitability is set to recover YoY by 2024 with greater demand visibility to prevail in 2HCY24.
“With the industry’s excess capacity gradually phasing out, we should see demand-supply equilibrium. We also expect the risk of price competition from Chinese peers to gradually subside.
“This is premised on arising quality concerns resulting in higher rejection rates from the US Food & Drug Administration, and Chinese players’ pivoting stance towards sustainability,” it said.
Unlike the other two research houses, RHB IB believes that ASPs will trend higher in 4QFY24 – tracking higher raw material and utility costs in 4QCY23 to 1QCY24.
“All in, we retain our view that gloves demand will continue pick up in the coming quarters, as client inventory levels continue to deplete – this is on top of their glove inventory levels (stockpiled since 2020) approach their expiry dates as typical shelf life for gloves is around 3 to 5 years.”
