Falling ASP casts doubt on Hartalega's outlook

KUALA LUMPUR: The sustainability of glove makers' earnings moving into the second half of the year has come into question even as Hartalega Holdings Bhd released a record-high quarterly earnings performance.

Maybank Investment Bank Research said Hartalega's 1QFY22 core earnings of RM2.3bil were in line with expectations at 47% of its full-year estimate and 55% of street's, but does not expect a repeat performance in the second half of the year.

This was owing to the average selling price (ASP), which has been on a decline since May 21 due to a lower gloves supply deficit and rising global vaccination rates.

The research house cut its FY22-24 earnings forecasts by 1.3% to 42% on the back of the falling ASP and the imposition of a two-week shutdown in operations due to the EMCO in early July.

"We downgrade Hartalega to 'hold'. Our new TP is MYR6.74 (from MYR9.80) on a lower 19x CY23 PER (-1SD of historical mean, from -0.5SD previously)," it said.

However, MIDF Research has maintained a more bullish outlook on Hartalega for the current financial year after the glove maker's 1QFY22 core earnings beat its expectations at 90.2% of its full-year estimate.

The research house said despite concerns over the growing competition in the coming quarters and impact of the movement restrictions on production, it is optimistic over the high vaccination rate where more than 90% of its employees have received their first vaccine dose.

MIDF projects a better utilisation rate and improved operational efficiency in 3QFY22 as well as a more stable business environment from supply and demand balancing out post-pandemic.

"It is possible that glove companies will review their expansion plan to cater to real market demand along the way. The ease in movement of foreign workers post-pandemic will also allow for the company to plan its operations more efficiently," it said.

MIDF raised its FY22 forecast earnings 59.6% to RM3.99bil in light of the better-than-expected 1QFY22 performance, while maintaining its FY23 estimates pending further clarity on the ASP trend.

It upgraded its call to "buy" but kept the target price of RM8.40.

Meanwhile, Kenanga Research opted to reduce its target price on Hartalega to RM11.35 from RM13.80 previously, which maintained its "outperform" recommendation.

"We still see significant value in Malaysian glove players, which command 65-68% of global market share and have consistently evolve and innovate in terms of products and plant modernisation via automations.

"In our view, the current share price weakness reflects an overly bearish take on the expected decline in ASP in subsequent quarters ahead," it said.

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