• Maintain BUY, new MYR3 TP (DCF) from MYR3.25. 3QFY24 (Mar) core profit slipped QoQ to MYR0.4m, bringing 9MFY24 numbers to account for 17% and 63% of our and Street’s expectations. The weaker-than-expected performance was on one-off logistical challenges arising from the Red Sea crisis and softer ASPs. Nonetheless, we maintain our bullish stance on Hartalega, underpinned by improvements in market dynamics (by 2HCY24) and operating efficiencies (post the decommissioning exercise) and a gradual easing in raw material costs.

• 3QFY24 results overview. 3QFY24 core profit returned to the black from losses a year ago, underpinned by improving operating efficiencies. Note: We excluded MYR20m in reversal of severance payments from 3QFY24’s core profit. On a sequential basis, softer volumes sold (-3% QoQ) dragged earnings down QoQ – no thanks to a logistical hiatus that saw 600m pieces of gloves not being shipped to customers. Nevertheless, Hartalega fulfilled its shipments by January and no orders were cancelled. Clients also did not revert to its competitors. ASP was lowered by 7% QoQ to USD19.70 from USD21.20/1,000 pieces – this was attributed to the easing of raw material prices in previous quarters.

• Outlook. We believe the worst is over, as glove makers’ profitability is set to recover YoY by 2024 with greater demand visibility to prevail in 2HCY24. With the industry’s excess capacity gradually phasing out, we should see demand-supply equilibrium. We also expect the risk of price competition from Chinese peers to gradually subside, premised on: i) Arising quality concerns resulting in higher rejection rates from the US Food & Drug Administration, and ii) Chinese players’ pivoting stance towards sustainability. Moving forward, we expect ASPs to trend higher in 4QFY24 – tracking higher raw material and utility costs in 4QCY23-1QCY24. All in, we retain our view that gloves demand will continue pick up in the coming quarters, as client inventory levels continue to deplete – this is on top of their glove inventory levels (stockpiled since 2020) approach their expiry dates (typical shelf life for gloves: 3-5 years).

• We lower our FY24F-25F earnings by 64-30% to account for weaker-than- expected volumes and less-aggressive ASP hikes moving forward. Our FY24 sales volume assumption takes into consideration the 600m in backlog orders, which will be recognised by 4QFY24.

• Maintain BUY. Post the earnings adjustment, we derive a lower MYR3 TP (DCF), which implies 25x FY26F P/E, ie slightly below the pre-COVID-19 5- year historical mean of 26x. Our TP incorporates a 2% discount, as Hartalega’s ESG score of 2.9 is below the 3.0 country median. Key risks include a drop in glove ASPs and higher-than-expected raw material prices.

Source: RHB Research - 7 Feb 2024