HARTA’s 9MFY24 results met expectations. It guided for an orders uptick in FY25, underpinned largely by restocking activities. With a low industry utilisation of about 40%, we believe any attempt to hike selling prices would likely backfire. We maintain our forecasts, TP of RM2.33 but cut our call to UNDERPERFORM from MARKET PERFORM as we believe its share price has ran up prematurely.

HARTA registered a cumulative net loss of RM2m for 9MFY24 vs. our fullyear net profit forecast of RM42m and the full-year consensus net profit of RM49m, respectively. We consider the results within expectation as we 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.

QoQ, its 3QFY24 revenue fell 8% due to lower sales volume (-3%) and ASP (-5%). Its EBITDA fell 7% to RM66m due to: (i) logistical challenges arising from the ongoing Red Sea crisis which has disrupted key shipping routes and led to shipment delays, (ii) higher input nitrile butadiene rubber price (+11%), and (iii) reduced economies of scale, particularly, poor cost absorption, as its utilisation rate continued to remain weak at 43% compared to 44% in 2QFY24. As a result, its 3QFY24 net profit was lower by 19% to RM22m. No dividend was declared in 2QFY24 which came in within our expectation.

YoY, its 9MFY24 revenue dropped 31% due to lower ASP (-13%) and volume sales (-20%). This resulted in a 9MFY24 net loss of RM2m compared to a profit of RM85m in 9MFY23.

The key takeaways from its analyst briefing yesterday are as follows:

1. HARTA highlighted that the shipment delays in 3QFY24 were estimated at 600m pieces with the bulk of them already shipped out in Jan 2024 while the remainders will be booked in 4QFY24.

2. It guided for an uptick in orders in FY25 underpinned largely by restocking by buyers. Already, HARTA has seen 4QFY24 orders inching closer towards 2b/pieces per month compared to 1.5b pieces/ month in 3QFY24. However, we believe 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.

3. HARTA is cautious about raising prices (to fully pass on the higher input cost) given the still competitive landscape in the industry. This is in-line with our view that raising ASP over the immediate term will be challenging. With a low industry utilisation of about 40%, this is without a doubt still a buyer’s market.

4. The group is of the view that capacity rationalisation and improvement in operational and cost efficiencies following the decommissioning of its Bestari Jaya (BJ) production facility is expected to bear fruits. Specifically, the group expect some cost savings of approximately RM2m-RM3m per month.

Source: Kenanga Research - 7 Feb 2024