Hartalega reported a net profit of RM31.9m in 1QFY25, marking a 111% QoQ increase from RM15.1m in 4QFY24, primarily driven by higher sales volume and ASPs. After adjusting for non-operating items, Hartalega’s core net profit stood at RM36.7m in 1QFY25, compared to a core net loss of RM1.5m in 4QFY24. While these results came in below market expectations at 19%, they exceeded our projections, reaching 36% of our full-year forecast, mainly due to a higher-than-anticipated sales volume. Hartalega is ramping up NGC1.5 to boost capacity by 2QFY24, to accommodate increasing orders. We view this development positively and hence, raising our FY25F earnings forecast by 13% to account for higher sales volume, while maintaining our FY26F-27F earnings projections. All told, we upgrade our call on Hartalega from Neutral to Outperform with a higher TP of RM3.16 based on 2.3x (near +1SD 1-year historical mean) and roll over our valuation to CY25F BVPS.

• Revenue. Hartalega’s 1QFY25 revenue increased by 10.2% QoQ to RM583.8m, mainly due to a 6% QoQ increase in sales volume to 5.9bn pcs. Note that Hartalega has faced a delayed shipment of c.600m pcs of gloves, which has been carried forward to July 2024. Utilisation rate increased to 78% in 1QFY25, up from 73% in 4QFY24. Hartalega plans to commence NGC1.5 expansion starting from 2QFY24, targeting to increase total installed capacity to 37bn pcs/annum, in anticipation of improvement in demand going forward. Meanwhile, ASPs has improved 4.2% QoQ to USD21/1k pcs in 1QFY25, partially due to cost passthrough on rising costs, but we are not expecting further increase in ASP as China is still selling at discount (c.USD17-18/1k pcs).

• Net profit. After stripping off the non-operating items, Hartalega reported a core net profit of RM36.7m in 1QFY25, a significant improvement from a core net loss of RM1.5m in 4QFY24. Hartalega’s PBT also improved 118% QoQ to RM41.1m in 1QFY25, from RM18.9m in 4QFY24, despite c.10-15% rise in raw material prices. We anticipate raw material prices to normalize in 2HFY25, which should sustain and improve operating margins going forward.

• Outlook. We are positive on Hartalega outlook, driven by sequential improvements in sales volume as customers continue to restock their depleting inventories. Though ASPs present upside challenges, we are optimistic about the group's strategic initiatives, particularly in the development of the new NGC 1.5 line, which is anticipated to accommodate increasing orders and enhance overall efficiency. Hartalega's resumption of a 60% dividend payout ratio, coupled with its robust net cash position of RM1.3bn, underscores its strong financial footing and capacity for sustained growth. All told, we upgrade our rating on Hartalega from Neutral to Outperform.

Source: PublicInvest Research - 7 Aug 2024