Hartalega profit affected by ‘intense’ competition

Analysts have cut their earnings forecasts for Hartalega, and also lowered their target prices, due to intense market competition from an oversupply and the normalising of average selling prices.

PETALING JAYA: The operating environment remains competitive for glovemakers such as Hartalega Holdings Bhd, which saw its net profit for the first half of financial year 2023 (1H23) decline 96.3% from a year ago to RM116.6mil. In research reports released yesterday, analysts have cut their earnings forecasts for Hartalega and also lowered their target prices, due to intense market competition from an oversupply and the normalising of average selling prices (ASPs).

Apex Securities Bhd said that glovemakers are experiencing rising operating costs due to higher natural gas prices, electricity tariffs and the new minimum wage. It added the global oversupply situation has forced the industry to operate at a suboptimal utilisation level.

The research firm noted that Hartalega’s net profit margin slumped to 4.8% in the second quarter of financial year 2023 (2Q23) as compared to 10.4% in the previous quarter, due to higher operating costs and a lower utilisation rate.

Given these factors, Apex Securities said it was cutting its net profit estimates for FY23 and FY24 by 39% and 19% to RM207.7mil and RM304.8mil, respectively.

It said Hartalega is “cautiously optimistic on the future prospects of the sector” and will continue to exercise better cost management, improve operational efficiency and scale up automation.

For the second quarter ended Sept 30, Hartalega’s net profit fell to RM28.34mil (from RM914.01mil a year ago) as revenue tumbled 70.9% year-on-year to RM584.56mil.

According to Hong Leong Investment Bank (HLIB) Research, Hartalega’s management expects market competition to remain intense in the immediate term, with ASPs to hover around low-US$20 (RM94.37) levels, while production lines continue operate at about 50% run-rate.

“Considering the tough environment, management has also indicated raising ASPs is a difficult feat at this moment and cost pressures will continue to mount going forward.

“That said, Hartalega projects that the overstocked situation could potentially start to improve towards the end of 1Q23, but we reckon the oversupply situation will likely last longer, as it takes time for the market to revert to equilibrium,” said HLIB Research.

The research firm said Hartalega could be at risk of being excluded from the FBM KLCI component stocks in the upcoming FTSE Bursa Malaysia KLCI semi-annual review as it currently ranks in 40th spot (based on Nov 8 closing).

“According to the index ground rules, constituents could potentially be removed from the index if they fall below the 35th spot.

“We caution a potential sell-down should the constituent change materialise,” added HLIB Research, which has cut its FY23 to FY25 earnings forecasts for the group by 17% to 45%.

Kenanga Research noted that Hartalega has deferred its 2023 expansion plans, which would have raised its capacity by 43%.

Another key takeaway from a briefing with the glovemaker’s management is that the group expects the oversupply and competitive pressures to persist at least over the next two quarters, which is more optimistic as compared with Kenanga’s view of 2024, based on demand and supply projections.

According to Kenanga’s estimates, the demand and supply situation will only start to head towards equilibrium in 2025, when there is virtually no more new capacity coming onstream, while the global demand for gloves continues to rise by 15% per annum, underpinned by rising hygiene awareness.

“FY23 and FY24 forecast net profits are downgraded by 39% and 26%. We also reduced FY23 forecast earnings before interest, taxes, depreciation and amortisation margin to 16% from 17%, but maintain FY24 margin assumption,” it said.

Based on Bloomberg data, consensus ratings on Hartalega showed 12 “sell” calls by research firms, while six had “hold” with three “buy” calls .