• Hartalega’s 2QFY25 results were below our expectations

• 2QFY25 recorded higher ASP and utilization rate, but fell short due to weaker-than- expected margins

• Cut 2025E EPS by 36%. Maintain BUY with unchanged target price of RM3.65

Result below our expectations

Stripping off RM33m forex losses, RM10m inventories written down, and RM54m deferred tax income, Hartalega’s 6MFY25 core net profit came in at RM30m (+44% YoY), accounted for 14% of our previous full-year forecasts (18% of consensus). The results fell short of our and consensus expectations due to higher-than-expected operating costs and unfavourable forex impact. 6MFY25 revenue grew 39% YoY to RM1.2bn, driven by stronger sales volume (+44% YoY) and average selling price (+11% YoY), notwithstanding, 6MFY25 EBITDA margin contracted by 8ppts on higher raw material (+8% YoY) and pre-operational costs incurred during the quarter.

Sequential improvement in sales volume and ASPs

Hartalega recorded a higher ASP of US$21-22k/pieces (+6% QoQ) and increased sales volume (+16% QoQ) in 2QFY25, driving an improved utilization rate to 90% (1QFY25: 78%) against its 32bn pieces capacity. As a result, 2QFY25 revenue rose 12% QoQ to RM652m. 2QFY25 recorded LBITDA of RM26m, impacted by higher raw material costs (+5% QoQ) and pre- operational cost. Given the improving demand, management has recommissioned 5bn pieces capacity from its NGC1.5 at the end of Sept24, bringing the total capacity to 37bn pieces. With costs expected to normalize in 3QFY25 and an improvement in sales volume and ASP (+5% QoQ), we expect earnings to see a strong turnaround. We believe that the imposition of a US tariff on Chinese medical gloves should see an incremental shift in orders to Malaysia, benefiting local glovemakers.

Reiterate BUY with an unchanged target price of RM3.65

We lower our FY25E earnings by 36% to account for the higher-than-expected operating costs in 2QFY24, largely driven by the sharp appreciation in RM (which comprises c.45% of its total costs). We make no changes to our earnings FY26–27E forecasts, as indications of China potentially raising prices in Europe could support ASP recovery moving forward. We reiterate our BUY rating and RM3.65 target price based on a PE multiple of 32x on FY26 EPS. Key downside risks to our BUY call include continued RM strength, weaker-than-expected sales volume, and ASPs.

Source: Philip Capital Research - 13 Nov 2024