Review

• Hartalega’s FY24 net profit of RM12.7mn came in below our and consensus expectations, accounting for 23.3%/25.9% of full-year forecasts respectively. The variance was largely attributed to higher-than-expected operating costs.

• QoQ, revenue improved 27.5% to RM529.8mn on the back of higher sales volume of 24% and marginal ASP increase of 2%. However, PBT dipped 35.0% to RM18.9mn due to margin compression from: i) higher NBR raw material of c.10% and ii) increased operating costs as a result of ramping up of NGC production activities in 1Q24. Separately, we note that all production lines in Bestari Jaya have decommissioned in 1Q24.

• FY24 PBT rose to RM38.7mn (vs. LBT of RM214.4mn in FY23) due to: i) one-off impairment loss following the decommissioning of Bestari Jaya in FY23 and higher interest income. However, revenue dipped 23.7% to RM1.8bn along with declines in ASP (-9%) and sales volume (-16%). Overall, the plant utilisation rate dropped to 48% (vs. 54% in FY23).

Impact

• Incorporating FY24 results, we raise our FY25/26F net profit forecasts to RM225.6/279.1mn (previously: RM217.5/255.1mn).

Outlook

• We understand that Hartalega has been ramping up production capacity (90% as of Mar’24 vs. 45% in Oct’23) at NGC to increase the output in anticipation of improving demand. Thus, we expect 2QFY24 sales volumes to increase by c.20% QoQ while ASP is expected to improve by c.5% QoQ.

• Management shared that there are no plans to monetise the Bestari Jaya land for now as the group has a prudent balance sheet, with a net cash position of RM1.4bn as at 4Q24.

• On expansion, NGC1.5, Sepang (Plant 8-9) with approximately 11bn gloves per annum capacity is scheduled to begin commissioning very soon (initiated test runs), to cater for the higher demand. All in all, the group expects end-FY25 capacity to increase to 36bn from 32bn currently.

Valuation

• Rolling forward the valuation base year, we raise the target price to RM4.08/share (from RM3.05) based on 2.9x FY26 P/B and maintain Buy recommendation Hartalega.

Source: TA Research - 23 May 2024