• Upgraded to HOLD (TP of RM2.60). Hartalega 1QFY25 core PATAMI of RM31.9mn was within our in-house expectation, making up 23.1% but below market estimates (16.3%). We make no changes to FY25-27F earnings forecast. We expect Hartalega to maintain positive earnings due to improved sales volumes and better utilization rates but the overall rubber glove industry's recovery to pre-COVID levels is hindered by structural issues and oversupply from Chinese manufacturers. We expect its earnings to return to pre-COVID level only in FY27/28F onwards. Due to the recent decline in share price, we have upgraded Hartalega to a HOLD call from a SELL, with unchanged TP of RM2.60, based on its 3-year average pre-COVID forward PE of 27x, pegged to CY26F EPS of 9.6sen.

• Key Highlight. Hartalega's revenue and PBT improved by 10.2% QoQ and 117.9% YoY respectively in 1QFY25, thanks to encouraging sales volume and higher ASP despite higher raw material costs and utilities expenses. This also led PBT margin to expand by 3.5ppts QoQ. On yearly comparison, revenue surged 32.7% YoY and PBT turned to black to RM41.1mn from LBT of RM42.5mn in the same period a year ago. During this quarter, the utilization rate ran at a commendable 78% (4QFY24: 73%) after completing the decommissioning of its Bestari Jaya production line during 4Q24.

• Earnings revision. Unchanged.

• Outlook. We anticipate that Hartalega will maintain positive earnings driven by improved sales volumes and a commendable utilization rate. Consistent order replenishment is expected to sustain, potentially boosting overall earnings. However, we remain concerned about the broader rubber glove industry's recovery to pre-COVID levels. Structural issues, particularly the oversupply resulting from massive production by Chinese manufacturers, continue to pose significant challenges.

Source: BIMB Securities Research - 7 Aug 2024