• Still BUY, new MYR3.55 DCF TP (from MYR4.10), 34% upside. Hartalega’s 1QFY25 (Mar) core earnings leapt to MYR37m from MYR1.8m a quarter ago, making up 16% and 19% of our and Street’s full-year projections. Its results were in line, as we expect stronger quarters ahead, backed by a pick-up in restocking activities, customers’ greater acceptance of its cost pass- throughs, and cost normalisation. We keep our bullish outlook. We think its stock re-rating is warranted, based on a gradual uptick in market dynamics.

• Results overview. HART’s 1QFY25 core earnings of MYR37m stemmed from an improvement in industry operating dynamics. ASP rose 3.8% QoQ in 1QFY25 (4QFY25: +1.7% QoQ) at USD20.80/1,000 pieces. Consequently, volumes sold rose 6% QoQ to 5.9bn pieces, resulting in a plant utilisation rate of 78% (+5ppts QoQ). Notably, there were 600m gloves in shipments delayed in 1QFY25 due to logistics issues. Nonetheless, HART was able to ship out the goods in July.

• Outlook. The rubber glove industry’s demand-supply dynamics continue to show signs of recovery, on the back of: i) The inventory-destocking cycle coming to an end; ii) improving order visibility (2Q24 Malaysia YoY glove export growth accelerated to 29% from -0.3% in 1Q24); iii) customers are becoming more accepting of price hikes. With the industry excess capacity gradually dissipating, we expect to see a demand-supply equilibrium by the end of 2024. While we remain sanguine on the recovery in demand, the recent global equity sell-off led to a c.25% share price correction over the last month. Nevertheless, we note that global glove demand was resilient during the past financial crises in 2000-2001 and 2007-2008 (Figure 3).

• Earnings adjustment. We cut FY25-26 earnings estimates by 9% and 7%, to account for the weakening USD (Figure 4).

• Still a BUY. Post estimates adjustments, we arrived at a lower TP of MYR3.55 (includes a 2% ESG discount). Our DCF-derived TP implies 39x CY25 P/E, or 1.2SD above its pre-pandemic 5-year historical mean of 27x. We expect HART to chart growth ahead, propelled by a pick-up in customer order replenishments, increasing acceptance of its cost pass-throughs, and cost normalisation (nitrile prices have eased by 3% QTD). We continue to like HART for its robust balance sheet, efficient operating model, and the company being a key beneficiary of the secular recovery in the medical glove sector.

• Key downside risks: Lower-than-expected sales volumes, weaker-than- expected USD vs MYR, and raw material prices being higher than estimated.

Source: RHB Research - 7 Aug 2024