Hartalega's target prices, ratings suffer on lower ASPs, one-off prosperity tax

KUALA LUMPUR (Feb 9): Some equity analysts have lowered their target prices (TPs) for Hartalega Holdings Bhd while others downgraded their ratings as average selling prices (ASPs) for gloves are expected to continue declining, coupled with the one-off prosperity tax from Budget 2022.

This came after the glove maker reported a 74.6% drop in net profit to RM259.06 million in the third quarter ended Dec 31, 2021 (3QFY22), from RM1 billion a year ago, due to lower ASPs and glove sales volume. Quarterly revenue fell 52.8% to RM1.01 billion from RM2.13 billion.

Hartalega's net profit rose 94.3% to RM3.46 billion in the nine months ended Dec 31, 2021 (9MFY22) from RM1.77 billion, while revenue climbed 57.4% to RM6.92 billion from RM4.4 billion a year ago.

Kenanga Research said the group's 9MFY22 profit after tax and minority interest (PATAMI) was below the research house's expectation. With ASPs no longer lofty, the research house said expectations for disappointment in subsequent quarters are expected to be capped.

“9MFY22 PATAMI of RM3,433 million (+94% y-o-y) came in below expectations, at 91%/96% of our/consensus full-year forecasts. The variance is due to the anticipated one-off prosperity tax in FY22 from Budget 2022.

“We lowered our FY22E net profit by 6% after imputing [a] higher effective tax rate of 30%, compared to 26% previously, taking into account the one-off prosperity tax in Budget 2022.

“We [also] downgrade our FY23E net profit by 8% taking into account: ASP reduced from US$27 (RM112.99) to US$26 per 1,000 pieces and EBITDA [earnings before interest, taxes, depreciation and amortisation] margin from 23% to 22%,” said its analyst Raymond Choo Ping Khoon in a note on Wednesday (Feb 9).

Kenanga reiterated its "outperform" call for Hartalega, but trimmed its TP to RM7 from RM7.50 based on unchanged 17 times calendar year 2022 (CY2022) revised earnings per share (at discount to five-year pre-Covid forward historical mean of 26-28 times).

Hong Leong Investment Bank (HLIB) Research left its FY22 forecasts unchanged at RM3.24 billion, but cut its FY23-FY24 forecasts by 10-36%. Following the earnings restatement, HLIB has lowered its TP to RM5.05 from RM6.10 but still rated "hold" for the stock.

“ASPs are expected to continue trending lower and management expects the ASP for 4QFY22 to be at circa US$28 level. Margins should also continue to narrow, given the inflationary pressures (i.e. higher energy and labour costs), and could potentially dip below that of pre-Covid levels,” according to HLIB analyst Sophie Chua Siu Li.

JF Apex Securities Research also concurred with the view, adding that the glove sector is experiencing a paradigm shift given oversupply conditions stemming from Chinese glove makers.

“We understand that Chinese manufacturers’ ASP is about 7% lower than Harta’s ASP on average. Chinese manufacturers have received rising orders from overseas markets, benefiting from cheaper glove prices offerings. Additionally, the group is also experiencing shortage of foreign workers due to closure of international borders. Furthermore, raw material costs are still sticky thus hampering the group’s operating margin moving forward,” said its analyst Nursuhaiza Hashim.

The research house tweaked down its FY22 and FY23 net profit estimates by 7.5% and 52.6% to RM3.7 billion and RM900 million respectively, by lowering its margin assumption coupled with lower sales volume due to delay in commencement of NGC1.5 (Plant 8-11) to fourth quarter of 2022.

“We maintain ‘hold’ [call] with a lower target price of RM5.05 (from RM5.66 previously) following our earnings downgrade. Our valuation is now pegged at 19.4x FY23 EPS of 0.26 sen (0.56 sen previously), which is below its mean PE of 33x but higher than -1 standard deviation of mean PE of 14.2x,” said Nursuhaiza.

CGS-CIMB Research has downgraded Hartalega to "hold" from "add" previously. It also cut its TP to RM5.80 from RM6.40.

“While we like Hartalega for its leading manufacturing technology in the nitrile space among peers, strong balance sheet (net cash of RM2.8 billion), and higher margins versus peers (past five-year average), its earnings prospects are likely to remain weak in the near term with limited upside potential,” said CGS-CIMB analyst Walter Aw.

MIDF Research downgraded Hartalega to "neutral" from "buy" with a revised TP of RM5.88 (from RM8.03).

“This is based on a PER of 21.0x which is its two-year historical average pegged to a revised FY23F EPS of 28 sen.

“The group has guided that prosperity tax adjustment would have an impact on earnings in the next quarter. However, the loss in earnings is forecasted to be mitigated by the stabilisation of nitrile rubber glove ASP in coming months. We revised our earnings estimates for FY23F at RM956 million to reflect the higher social compliance costs and conversion cost of raw materials as highlighted by the management,” said MIDF.

Hartalega led the top losers on Bursa Malaysia as at the time of writing on Wednesday. Its share price fell 6.64% to RM5.20, with a market capitalisation of RM17.82 billion. The stock has depreciated 74.36% from its peak of RM20.28 on July 30, 2020.

Read also:Hartalega declares 14.8 sen dividend for 3Q despite net profit decline of 74.6%