Hartalega’s 1HFY22 net profit grew by 315% YoY to RM3.27bn, predominantly due to higher sales volume and average selling prices (ASP), though this was offset by higher raw material cost. The results came in above both our and consensus estimates at 78% and 83% of full-year numbers respectively. We still deem Hartalega’s performance in line with our projections however as we expect weaker quarters ahead, reflecting the effects of a lower utilization rate and softening ASPs. We lower our forecasts for FY22-24F by 1-24% on account of these, and to also account for the recently-proposed Cukai Makmur in the Budget 2022 announcement. Our TP is subsequently lowered to RM6.13 based on an unchanged 26x PE multiple (at its pre-Covid 5-year historical mean) to CY23F EPS of 23.6se. Given the limited price upside, we cut our call on Hartalega to Neutral. On a side note, Hartalega declared the first interim dividend amount to 35.2sen per share.

• Net profit down by 60% QoQ. Hartalega’s 2QFY22 revenue dropped by 49% QoQ to RM2.0bn, due to lower sales volume (-34% QoQ) and lower ASPs (-27% QoQ) during the quarter. Net profit has consequently declined by 60% to RM913.3m in tandem with the lower sales revenue. Weaker sales volume has been attributed to 1) buyer caution in view of declining selling prices and 2) the implementation of Enhance Movement Control Order (EMCO) in Selangor as well as the National Recovery Plan (NRP) which saw companies only allowed tooperate with 60% workforce. The lower ASPs, meanwhile, was mainly due to increased competition from Malaysia, China and Thailand which had created pricing pressures. Net profit margin was further affected by higher raw material cost. Utilization rate fell to 63% as opposed to 88% in 1QFY2022 as a result of the workforce restrictions and oversupply issues.

• ASPs stabilizing, utilization rate recovering. Management expects that the ASPs will stabilize in 2HFY2022. Due to higher costs incurred, other glove players are not expected to cut the ASPs further. Utilization is also expected to reach 70%-80% in early CY2022 once the labour shortage issues are resolved, and the supply-demand dynamics normalize.

• Cukai Makmur. Management is of the view that the recent announcement on imposition of “Cukai Makmur” in Budget 2022 will materially impact the bottom line of the company in 2HFY22. This is because Hartalega’s year of tax assessment for 2022 falls during the period of 1 April 2021 to 31 March 2022, which is the most profitable period for most of the glove players. The additional tax bill is estimated at about RM400m.

• Expansion plans. Hartalega’s Plant 7 (+3.4bn pcs pa) has commissioned a total of 8 lines thus far, with the remaining 2 surgical glove production lines expected to come on stream in the coming quarters. The commissioning of NGC 1.5’s 1st line has also been delayed and is expected to start in April CY22.

• Outlook. Over the longer term, management expects the glove industry to undergo a structural step-up in demand. Post-pandemic glove usage is expected to increase notably from emerging markets with low glove consumption per capita, amid heightened hygiene awareness.

Source: PublicInvest Research - 3 Nov 2021