• Maintain SELL (TP of RM2.60). Hartalega FY24 core PATAMI of RM40.7mn was below our in-house and market estimates, only account for 69.2% and 83% respectively. We cut FY25F earnings forecast by 6.4% to RM132.2mn to account for lower margin. We expect Hartalega to sustain positive earnings due to improved sales volume and consistent order replenishment despite demand remaining below pre-COVID-19 levels. Nevertheless, we expect its earnings to return to pre-COVID level only in FY27/28F. Maintain a SELL call for Hartalega with higher TP of RM2.60 (RM2.08 previously) based on its 3-year average pre-COVID forward PE of 27x pegged to CY26F EPS of 9.6 sen. We think the stock price is running ahead of fundamental, hence we advise investors to revisit at lower level.

• Key Highlight. Hartalega registered a core LATAMI of RM3.9mn after excluding the reversal of a provision made for a foreign subsidiary which is currently under bankruptcy proceedings, amounting to RM19mn. EBITDA margin was weak at 3.8% was due to higher raw material prices and operating costs. Nonetheless, revenue posted double-digit growth of 27.5% QoQ, driven by better sales volume and an increase in ASP. 4QFY24 sales volume improved 24% QoQ while ASP increased marginally by 2% QoQ. We understand that the surge in sales volume was due to the backlog order in the previous quarter which was reflected during this quarter. On the NGC1.5 plant update, the group aims to increase its capacity by 4bn from the current 32bn to 36bn, by FY25. This increase will be achieved through the gradual commissioning of new production lines.

• Earnings revision. We cut FY25F earnings forecast by 6.4% to RM132.2mn as we revised lower our margin assumption. Also, we introduced FY26F/FY27F earnings forecast of RM235mn/RM362mn, based on utilisation rate of 70% and 72% respectively.

• Outlook. We expect Hartalega to sustain positive earnings due to improved sales volume. Although demand remains below pre-COVID-19 levels, consistent order replenishment could boost earnings. Overall, we are optimistic about the rubber glove industry recovering from its worst, with improved demand and bottoming ASP.

Source: BIMB Securities Research - 23 May 2024