KUALA LUMPUR: Hartalega Holdings Bhd
's latest set of results is bolstering optimism the glove maker will deliver sequentially stronger earnings in the coming quarters amid an improving demand outlook.
In a review, Hong Leong Investment Bank (HLIB) Research said an inventory replenishment cycle has commenced as gloves amassed during the pandemic are believed to be near depletion.
Hartalega has indicated a jump in customer orders with about 2.2 billion pieces of glove orders per month - representing full plant utilisation for NGC 1.0 - from March onwards as compared to about 1.9 billion in 4QFY24.
Given the rising demand, HLIB said it expects glove makers' customers to be more willing to accept higher average selling prices (ASP) in 1QFY25 to allow them to pass on higher raw material and natural gas prices.
The research firm also expects potential trade diversion from the US as a result of US FDA import alert issues and higher import tariffs in 2026.
In addition, the group's NGC1.5 manufacturing facility will also be commissioned while its cost structure will be lower post-decomissioning of the Bestari Jaya plant.
In terms of capacity, Hartalega’s internal target is to increase from 32 billion pieces per annum in FY24 to 36 billion in FY25 by commissioning NGC1.5, depending on market conditions.
In the final quarter of FY24, Hartalega posted a core profit after tax and minority interest (Patmi) of RM1.3mil, bringing its FY24 sum to RM15.7mil, down 89.5% year-on-year.
HLIB said this was in line with its forecast but below consensus at 32% of full-year estimate. It maintained a "hold" call on Hartalega with an unchanged target price of RM3.62.
"While we are overall positive on the improving operating environment, we think that the recovery thesis by 2025 is fairly priced in," said the research firm.
Hartalega's shares jumped 30% in mid-May 2024, and were last traded at RM3.59 a share on Tuesday.
MIDF Research, meanwhile, is also optimistic about Hartalega's FY25 prospects given an improvement in the industry outlook.
"We gather that the oversupply situation is softening thanks to the Malaysian manufacturers' capacity rationalisation and most newer players exiting the market.
"This, along with the depletion of pandemic stockpiles, has gradually recovered global demand (reflected in the improving glove orders in 1QFY24)."
MIDF expects utilisation rates to remain above 70%, supported by better glove demand and the decommissioning of the old Bestari Jaya plant, enhancing production efficiency.
"This, along with increased capability to pass on higher costs via price adjustments, is expected to lower production costs per unit, improve margins, and enhance earnings," it added.
The research firm upgraded its recommendation to "buy" from "neutral" with a revised target price of RM4.45, up from RM2.45 previously.
Taking a more guarded view, Kenanga Research expects a more protracted oversupply situation, with the imbalance only heading towards equilibrium in 2026.
It said the demand-supply situation will resolve when there is virtually no more capacity coming onstream while global demand continues to rise 15% per annum underpinned by rising hygiene awareness.
"We expect the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply," it said in a note.
Kenanga reiterated its "underperform" recommendation and target price of RM2.33.
