• Maintain BUY, with new MYR4.10 TP (DCF) from MYR3.40, 14% upside. Hartalega’s 4QFY24 (Mar) core earnings leaped to MYR1.8m QoQ from MYR0.4m, bringing its FY24 earnings to 49%/63% of ours and Street’s expectations. Despite weaker-than-expected results, its performance had started to improve in 2Q24 (ie better cost-pass-through, demand picking up). As such, we maintain our bullish stance and believe valuation re-rating is warranted based on the gradual uptick in market dynamics. Our TP includes a 2% discount as Hartalega’s ESG score is below the country median.

• Results overview. Hartalega delivered 4QFY24 core earnings of MYR1.8m, thanks to improved operating efficiency. Do note that we excluded MYR19m from the expected recovery on asset upon liquidation (in association with the ongoing bankruptcy legal proceeding of Yancheng MUN Medical Equipment Co) from 4QFY24 core earnings. On sequential basis, Hartalega posted 1.7% QoQ growth in ASP (at USD20.10 per 1,000 pieces). Consequently, volume sold increased 24.7% QoQ to 5.59bn pieces, resulting from plant utilisation rate of 73% - representing 14ppt QoQ increase assuming its effective production capacity was 30.6bn (from 42bn) in the previous quarter.

• Outlook. Industry demand-supply dynamics continue to show signs of recovery on the back of: i) Inventory destocking cycle coming to an end, ii) improving order visibility (April and May order volumes picking up), and iii) customers are more receptive of price hikes. With the industry excess capacity gradually phased out, we expect the glove industry to achieve demand-supply equilibrium by end of 2024. We also expect the risk of price competition from Chinese peers to gradually subside premised on: i) Rising quality concerns resulting in higher rejection rate from US FDA, and ii) Chinese players’ stance pivoting towards sustainability. Moving into 1QFY25, higher ASP is expected (USD21-22) on the back of higher raw material cost incurred in the previous quarters. Monthly production run rate was guided to improve 10% QoQ to 2.2bn from 1.9-2bn currently.

• Earnings adjustment. We raised our FY25-26 earnings estimate by 7% and 4% to account for better-than-expected sales volume while revising our 2025-2026 calendar year-end capacity to 36bn and 40bn. Our WACC was lowered to 6.5% from 6.9% after trimming required return to 6.5% from 6.9% as the sector outlook has turned in the glovemakers’ favour.

• Still BUY. Post-earnings adjustment, we raise our TP to MYR4.10. Our DCF- derived TP implies 28x FY27F P/E, slightly above its pre-COVID-19 5-year historical mean of 26x. We like Hartalega due to its robust balance sheet, efficient operating model, and a key beneficiary of the recovery in medical glove sector. Key risks: Lower-than-expected sales volume, weaker-than- expected USD/MYR rate, and higher-than-expected raw material price.

Source: RHB Research - 23 May 2024