• Maintain BUY and DCF-derived MYR4.10 TP, 23% upside. Hartalega is scheduled to report its 1QFY25 results on 6 Aug. We expect the company to deliver core earnings of MYR20-25m (vs MYR1.8m in 4QFY24), on the back of stronger sales volume and ASPs. 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 preview. We expect Hartalega to deliver a core profit of MYR20-25m (vs MYR1.8m in 4QFY24) on the back of: i) Improving demand outlook (c.8% volume growth) coupled with an uptick in operating efficiency (79% from 73%), and ii) recovery in ASP (+5% QoQ). We forecast quarterly revenue at MYR602m – representing sequential growth of 13.6%. Cost wise, we estimate a 3% QoQ increase predicated by higher nitrile and natural gas prices. This will lead net margin to improve further to 4% from 0.3% in 4QFY24.

• Industry dynamics turning favourable. We believe the industry’s operating dynamics are turning in favour of the glove manufacturers as customers are more receptive to ASP increases. This, together with: i) The pricing gap to the China glove makers narrowing to USD2-3 from USD4-5 per thousand pieces, ii) improving demand outlook, with Malaysia’s glove exports volume uptrend continuing (2Q24: +8% QoQ, +29% YoY in 2Q24), and iii) post capacity rationing exercise, should anchor the profitability of glove makers in the coming quarters.

• Earnings revision and valuation. We make no changes to our earnings estimate. Note that we had previously factored in an additional 4bn new capacity as a result of the relocation of production lines to its Next Generation Complex (NGC) 1.5 plant by end-2024. Our DCF-derived TP implies 3x FY25F P/B, below its pre-COVID-19 average of 5.5x. We like Hartalega due to its robust balance sheet, efficient operating model, and being a key beneficiary of recovery in the medical glove sector.

• Key risks. Decrease in gloves ASP, slower-than-expected demand recovery, lower-than-expected utilisation rate, and higher-than-expected raw material prices.

Source: RHB Research - 31 Jul 2024