4QFY22: Within Expectations As Volume Sales Recover
Losses for the quarter were attributed to a backloaded prosperity tax expense. While
ASPs continued to slide, Hartalega’s volume sales recovered and are expected to be
stable for the rest of the year. 2QFY23 will likely see higher ASPs in tandem with higher
input costs but the inability to fully pass through costs will likely see margins remain
under pressure. As sector downside persists amid decent valuations, we maintain our
HOLD recommendation with an unchanged target price of RM4.60.
RESULTS
• Within expectations. Hartalega Holdings’ (Hartalega) 4QFY22 core net profit was –
RM198m (-176% qoq, -118% yoy). It brought FY22 net profit to RM3,235m (+12.1% yoy).
This was within our and consensus expectations, accounting for 105% and 98% of ours and
consensus’ full-year estimates respectively. Losses for the quarter are attributed to a one-off
provision of additional tax expense attributed to the prosperity tax. Had it not been for the
prosperity tax, Hartalega would have registered a profit in the region of RM170m. Hartalega
declared an interim DPS of 3.5 sen, bringing cumulative DPS to 73.3 sen (2021: 33.3 sen).
• ASPs to decline in subsequent quarter as well but appears to have found a bottom.
Revenue declined marginally by 3.7% qoq (-58% yoy) in 4QFY22. Recovery in volume sales
(+33% qoq) was offset by lower blended ASPs (-28% qoq). Robust volume sales are
attributed to the clearance of backlog sales from the previous quarter and nascent recovery
in demand following the easing of inventory. ASPs are expected to be lower in 1QFY23 but
June ASPs have been raised following higher input cost.
• Margin decline should ease. The EBITDA margin declined to 26.7% (or 12.2 ppt qoq). This
was primarily off lower ASPs (average of US$31.5/’000 pieces), outstripping the contraction
in input cost (-14.9%). Going forward into 1QFY23, ASPs are expected to see a marginal
decline following the step down in ASPs over the previous quarters. That said, margins are
expected to deteriorate following an uptick in input cost, minimum wage and energy cost.
June ASPs are raised in lockstep with higher input cost but Hartalega cautioned that it is not
at a full cost pass-through as the industry dynamics remain delicate.
STOCK IMPACT
• Demand-supply dynamics still appear subdued. New entrants into the industry that we
observed, on average registered a -7.4% profit margin in 4Q21, that should further
deteriorate alongside industry dynamics. Following industry normalisation, we expect exits
and scaled-back expansions to help ease demand-supply dynamics. Competition arising
from China is said to remain stiff. Given the fragility to equilibrium and utilisation rates
remaining below optimal levels, there could be downside to Malaysia Rubber Glove
Manufacturer’s Association’s (MARGMA) growth expectation of 12-15% yoy growth for 2022.
Against this backdrop, we envisage that margins may find a bottom towards the tail-end of
the year.
EARNINGS REVISION/RISK
• No changes to earnings. Key downside risks include: a) softer-than-expected ASP revisions,
and b) stiff competition persisting.
VALUATION/RECOMMENDATION
• Maintain HOLD with an unchanged target price of RM4.60. Our target price is pegged to
a PE of 28x to FY23’s earnings or close to -0.5SD to its five-year PE mean. Hartalega’s
outlook is largely weighed by headwinds clouding visibility of the sector that otherwise offers
structural growth. The possible risks to earnings downside or disappointing consensus
forward earnings expectation is reflected in our peg close to its -0.5SD of its five-year PE
mean.