KUALA LUMPUR (May 11): Analysts on Wednesday (May 11) cut their earnings forecasts for Hartalega Holdings Bhd on lower glove average selling prices (ASPs) and sales volume, as well as higher cost.

This was after the group posted its first-ever quarterly loss of RM197.9 million for the fourth quarter ended March 31, 2022 (4QFY22) due to a provision for the Prosperity Tax (Cukai Makmur). This brought its full-year earnings for FY22 to RM3.23 billion.

The results were within most analysts' expectations.

KAF Research analyst Nabil Zainoodin said in a note that he expects the group to return to profitability next quarter as the management had guided that the effective tax rate will be lower than the prevailing corporate tax rate of 24% from next quarter.

“That said, Hartalega's near- to mid-term outlook remains challenging given the intense competition resulting from the oversupplied glove market. The downward pricing pressure in the current environment would make it difficult for the group to fully pass on the rising input cost to customers, which could result in further margin compression,” he said.

Additionally, he said global logistics disruptions and container shipping shortages may continue to affect shipments and possibly may persist for the next few quarters.

Post the full FY22 results release and based on the management's forward guidance, he revised his FY23 and FY24 earnings forecasts for Hartalega downwards by 11% and 3% to RM582.8 million and RM528.3 million respectively.

"We maintain our 'sell' recommendation on Hartalega and revise our target price (TP) to RM3.66 from RM3.80 previously based on 2023 of 15.9 sen pegged at -0.5 standard deviation below the five-year historical mean forward price-earnings ratio (PER) of 23 times," he said.

Affin Hwang Investment Bank analyst Ng Chi Hoong also in a note lowered his FY23 and FY24 earnings per share (EPS) forecasts for Hartalega by 1.5% and 0.4% to RM634.3 million and RM832.7 million respectively to factor in the latest performance, and the latest ASP and sales volume assumptions.

“We are not expecting a major improvement in sales volume in the next few quarters as the lack of workers has limited Hartalega’s ability to increase output,” he said.

He also said the group’s margins are likely to remain depressed due to competition.

He believes that its earnings before interest, taxes, depreciation and amortisation (EBITDA) margin had yet to bottom at 26.7% in 4QFY22, given that it was still significantly above the 22% to 23% achieved in 2019.

“The management highlighted that as there is new capacity coming through in the first half of 2022, margins would continue to remain depressed as it would be challenging for Hartalega to raise ASPs to pass on the rising production cost. As such, we reckon that profit margins would only likely bottom out by the end of 2022,” he said.

He maintained his "sell" call on Hartalega due to continued uncertainty over future ASPs and lowered his TP to RM3 from RM4.60 based on 13 times 2023 PER (from 12.5 times 2022 PER).

Meanwhile, PublicInvest Research said in a note that it expects a weaker performance for Hartalega in FY23 as inflationary pressure would lead to higher raw material costs.

“Therefore, we lower our forecasts for FY23 and FY24 by 10% and 26% to RM731 million and RM620.3 million respectively to factor in higher cost,” it said.

However, as Hartalega’s long-term prospects remain positive, the research house maintained its "neutral" call on Hartalega with a revised TP of RM4.92 based on a PER of 26 times (at its pre-Covid-19 five-year historical mean) 2023 EPS of 18.9 sen.

MIDF Research, which opined that Hartalega's results came in below its expectations, also revised its FY23 earnings forecast downward by 21% to RM755.8 million to reflect higher social compliance cost, higher operating cost due to the implementation of the new minimum wage policy and conversion cost of raw materials as highlighted by the management.

It maintained its "neutral" call on Hartalega but cut its TP to RM4.31 (from RM5.88) based on a PER of 19.5 times, which is the two-year historical average pegged at a revised FY23 EPS of 22.1 sen.

Likewise, TA Securities analyst Tan Kong Jin adjusted his FY23 and FY24 earnings forecasts for Hartalega lower by 6.9% and 11% respectively after reducing his sales volume assumptions by 7.9% due to a slower pace of commissioning of the Next Generation Integrated Glove Manufacturing Complex (NGC) 1.5. 

Going into 1QFY23, he expects ASPs to soften further by about 15% quarter-on-quarter, while the utilisation rate will remain at around 70%.

Headwinds are expected to persist due to inflationary pressure (the higher minimum wage and gas tariff) as the group is unable to fully pass through the cost increases, he added.

Positively, he said ASPs seem to have troughed and are expected to be higher by about 8% in June.

Following the earnings revision, he reduced his Hartalega TP to RM5.06 from RM5.62 based on an unchanged 30 times 2023 EPS. He, however, maintained "buy" on Hartalega.

Kenanga Research analyst Raymond Choo Ping Khoon also downgraded his FY23 net profit forecast for Hartalega by 16% to RM585.6 million, taking into account ASPs being reduced to US$25 per 1,000 pieces from US$26, and the EBITDA margin shaved to 20% from 22%.

While reiterating "outperform" on Hartalega, he reduced his TP to RM5.60 from RM7 based on 30 times 2023 EPS (at slightly above the five-year pre-Covid-19 forward historical mean).

At 10.36am on Wednesday, Hartalega was unchanged at RM4.34, valuing the group at RM14.88 billion. Year to date, the counter has tumbled 23.05%.

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Cukai Makmur drags Hartalega into first-ever quarterly loss in 4QFY22