• Maintain BUY, higher MYR3.70 TP (DCF) from MYR3.47, 11% upside. 2QFY25 (Mar) saw a MYR29.5m core loss from core net profit a year ago, bringing 1HFY25 numbers to account for 8% each of our and Street’s expectations. Results were below expectations, dragged by unfavourable FX losses and rising raw material costs. All in, we continue to maintain our bullish stance on Hartalega and believe a valuation re-rating is warranted, premised on resumption of restocking activities, beneficiaries of trade diversion, and customers’ greater acceptance for price increases.

• Results overview. 2QFY25 saw a core loss of MYR29.5m (2QFY24: MYR27m core net profit) on unfavourable FX and higher raw material costs. Sequentially, earnings were hit by rising operating costs associated with new production line ramp-ups. ASPs posted 2.8% QoQ growth in 2QFY25 to USD21.40/1k pieces (pcs). Consequently, volume sold rose 15.5% QoQ to 6.8bn pieces, resulting in a plant utilisation rate of 89.5% (up 12ppts QoQ). Notably, there were 450m glove shipments impacted by global logistics constraints. HART was able to ship out the goods in the subsequent quarter.

• Outlook. Industry operating dynamics remain in favour of glove manufacturers, as customers are more receptive to ASP increases. That said, industry-blended ASPs are set to rise by at least USD1-2/1k pcs by 4QCY24, as Malaysian glove makers look set to raise prices to translate the effects of a weakening USD to customers. Department of Statistics export data suggests Malaysian glove exports growth will continue to accelerate in 3Q24 after reporting a 20% volume growth (2Q24: +8%). Overall, we think local glove manufacturers could stand to benefit from potential trade diversions, given the deteriorating US-China relationship. While China could potentially expand its foothold in non-US markets, we believe the net impact to local glove makers will remain positive, given thattypical sales to the US command higher ASPs (at least USD1-2/1k pcs) than other regional customers due to stringent acceptable quality level standards there.

• Earnings adjustment. We lower our FY25F-26F earnings by 34-20% to account for higher start-up costs and rising raw material prices – offset against more favourable USD/MYR assumptions (FY25F-26F: 4.40/4.28 from 4.33/4). Despite these earnings cuts, we derive a higher TP of MYR3.70 after lowering our WACC assumptions to take into account a more favourable market dynamic moving forward. Our DCF derived-TP implies FY26 P/BV of 2.6x, 2SD above its 2-year historical mean. It also incorporates a 2% ESG discount. Looking ahead, we expect HART’s growth to be underpinned by a pick-up in customer order replenishments, increasing acceptance for cost-pass-throughs, and being a key beneficiary from trade diversions arising from US impositions of import tariffs on China.

Source: RHB Securities Research - 13 Nov 2024