Rubber glove players take ESG more seriously

Strong results: A worker monitors Hartalega’s production line. Hartalega posted a net profit of RM3.18bil in the first half of financial year 2022.

PETALING JAYA: The risk for Hartalega Holdings Bhd to be imposed with an export ban on its goods by the US Customs and Border Protection (US CBP) appears to be minimal compared with its other competitors.

This is following Hartalega’s engagement with the US CBP since October 2020, said MIDF Research in its latest report.

The research house opined that rubber glove industry players are now taking the environmental, social and governance (ESG) issues more seriously and will spend more on social compliance costs, which likely will be passed on to their customers.

Hartalega posted a net profit of RM3.18bil in the first half of financial year 2022.

This is above MIDF Research and consensus expectations as it made up 79.4% and 83% of the respective full-year estimates.

Hartalega’ management in a recent briefing had shared that due to multiple reasons, the average selling prices (ASPs) of nitrile rubber gloves are now seeing price stabilisation.

China rubber glove players as a whole, the largest competitor to the global rubber industry players, are now experiencing a power supply crunch.

With the help of the Chinese government, it has reduced the energy cost but unlikely to the levels of Hartalega’s energy cost, added MIDF Research.

Secondly, with the gas price revision in September 2021, the group is looking to pass down the cost to customers. It also expected the rest of the industry players to do the same.

On Hartalega’s outlook, MIDF Research has revised downward the group’s earnings estimates by 10.1% to RM3.59bil for financial year 2022 (FY22) and 4.4% to RM1.14bil in FY23 respectively.

“Even with all the positive outlook, Hartalega is likely to be one of the few companies hit the hardest by Cukai Makmur,” noted the research house.

MIDF Research said: “We estimate that the Cukai Makmur (prosperity tax) by the government will cost Hartalega an additional RM639.2mil in our earnings estimates for FY22.

“However, the loss in earnings is forecast to be slightly mitigated by the stabilisation of nitrile rubber glove ASP in the coming months.”

MIDF Research maintained a “buy” call on Hartalega but with a lower revised target price of RM8.03 from RM8.40 previously.

Hartalega remains its top pick in the rubber glove sector, given the group’s innovative approach towards automated production and focus on mitigating ESG issues, which are grave concerns among investors, said the research house.

Meanwhile, Kenanga Research has reiterated an “outperform” on Hartalega with a slightly reduced at RM8.70 from RM8.85 earlier.

This is based on unchanged 16 times calendar year 2022 earnings per share estimates at discount to five-year pre-Covid forward historical mean of 26-28 times.

“Since the ASPs are no longer lofty, expectations of disappointments in subsequent quarters are expected to be capped,” the research firm said in its latest report.

It noted that Hartalega management expects demand to start surging in January next year.

The uptick in demand was evident since October and saw utilisation rate back up to 70%-80% compared with 60%-70% currently, added Kenanga Research.

Furthermore, the recent round of reporting season for glove makers suggested that the ASP trend is expected to soften faster than expected in the subsequent quarters.

“Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment,” said Kenanga Research.

It also believed that this signals acceleration in overall market ASP normalisation.

“We are unable to quantify as to how low ASP will fall to; however, glove manufacturers are of the view that ASP is unlikely to go below pre-Covid-19 pricing, considering that the cost structure has risen, which include social compliance costs and the high nitrile feedstock cost compared to pre-Covid era,” it said.

Kenanga Research has lowered Hartalega’s net profit by 4% for FY22 after imputing higher effective tax rate of 26% compared with 22% previously, taking into account the one-off the prosperity tax in Budget 2022.

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