Impact of prosperity tax to hit 4QFY22
? We deem 9MFY3/22 net profit of RM3.4bn largely in line (109% of our FY22 estimate) as we expect losses in 4QFY22F from the prosperity tax.
? We expect ASPs to only bottom in 1QFY22 (at US$24-25 per 1k pieces), with supply-led dynamics in the sector putting pressure on ASPs.
? Downgrade to Hold, with a lower TP of RM5.80 (28x CY23F P/E).
9MFY22 net profit rose 94.4% yoy to RM3.4bn; within expectations
While 3QFY3/22 net profit declined 71.4% yoy to RM259m, 9MFY3/22 net profit still rose 94.4% yoy to RM3.4bn. We deem this in line with our FY22 estimate (109%) but below Bloomberg consensus’ (97%). We expect Hartalega to record losses in 4QFY22F due to lower ASPs and RM375m impact from prosperity tax. An interim dividend of 14.8sen/share was declared, bringing 9MFY22 dividend to 69.8sen/share, in line with our expectation.
3QFY22: Weaker due to lower sales volume and decline in ASPs
On a qoq basis, 3QFY22 revenue and net profit declined 50% and 71.4% respectively. The weaker qoq results were mainly owing to: i) a decline in ASPs (-39.8% qoq), ii) lower sales volume (-16.9% qoq), and iii) lower economies of scale. The weaker sales were due to weaker demand from customers (keeping low inventory levels); it also saw some shipment delays due to logistical issues (order backlog of an estimated 1bn pieces).
ASPs to likely bottom in 1QFY22F
We expect Hartalega’s ASPs to bottom in 1QFY22F (at US24-25 per 1k pieces). Though glove buyers are currently cautious in restocking their inventories as industry dynamics continue to be supply-led, we expect the situation to improve once ASPs bottom with the improvement in the industry’s supply-demand dynamics (slower expansion plans by all glove makers). On the bright side, Hartalega expects a gradual uptick in orders from 4QFY22 onwards, thanks to increasing demand from customers in developed markets.
Slowing down expansion plans due to the current environment
Hartalega is also slowing down its capacity expansion plans. Its first line in Plant 1 (4.7bn pieces p.a. – 12 lines) of Next Generation Complex 1.5 (NGC 1.5 – total capacity of 19bn pieces p.a.) will only be commissioned in 4QFY3/23 (previously target: 1QFY3/23). The delay is due to: i) weak market supply-demand dynamics, ii) labour shortage, and iii) construction delays. It aims to commission one line a month, with full commissioning of Plant 1 of NGC1.5 by 3QFY3/24. Upon the full commissioning of Plant 1, Hartalega will assess plans to commission lines in the remaining plants (Plants 2, 3 and 4) in NGC1.5.
Downgrade to Hold, TP lowered to RM5.80
We lower FY22-24F EPS to account for lower ASPs and sales volume. Hence, our TP falls to RM5.80 (28x CY23F P/E, current 5-year historical mean). While we like Hartalega for its: i) leading manufacturing technology in the nitrile space among peers, ii) strong balance sheet (net cash of RM2.8bn), and iii) higher margins vs. peers (past 5-year average), its earnings prospects are likely to remain weak in the near-term with limited upside potential.