Review

• Hartalega reported 9MFY24 results, which were below our expectations. 3QFY24 net profit declined by 19.2% to RM22.4mn. The variance was largely attributed to lower-than-expected volumes.

• QoQ, revenue dipped 8.1% to RM415.6mn due to lower sales volume of about 2.8% and a drop in ASP of circa-5.1%. We gather that the group encountered logistical challenges (c.600mn pcs) from the shipping constraints amid the ongoing Red Sea crisis. Overall, plant utilisation rate dropped to 43% (vs. 44% in 2QFY24).

• 9MFY24 profit before tax declined to RM19.9mn as compared to RM140.7mn in 9MFY23. The weaker performance was attributed to the supply chain inventory adjustment as sales volumes and ASP declined by 20.4% and 12.5% respectively.

Impact

• We reduced our FY24 earnings estimates to RM54.6mn (vs. RM123.4mn previously) after lowering our sales volumes assumptions by 21.4% to 18.7bn gloves. Meanwhile, we maintain our FY25/26 earnings assumptions.

Outlook

• Into 4QFY24, we expect sales volumes to increase by about 11% QoQ as the bulk of 600mn pcs (shipping constraints) was shipped in January. Management shared that Hartalega is unable to meet the current 2bn orders per month (vs. 1.5bn per month in 3QFY24) due to the decommissioning exercise (product transfer to NGC, deployment of 1.6k employees) of Bestari Jaya, which will be completed by 1QCY24. Positively, we understand that the group will catch up (getting more lines up) by end-March.

• Meanwhile, ASP is expected to increase slightly QoQ due to the higher natural gas cost (+4%) in Jan-24. Overall, we believe that Harta’s performance will improve, driven by higher volumes, better efficiency and cost savings from the decommissioning of Bestari Jaya.

Valuation

• We maintain our TP for Hartalega at RM3.05/share based on 2.2x FY25 P/B. Reiterate our Buy recommendation on the stock.

Source: TA Research - 7 Feb 2024