KUALA LUMPUR (Nov 9): Analysts have lowered their target prices (TPs) for Hartalega Holdings Bhd by as much as 26.7%, after the glove maker's net profit for the second quarter ended Sept 30, 2022 (2QFY2023) plummeted by 96.9% to RM28.3 million, as lower average selling price (ASPs) of gloves and volume eroded revenue, while higher energy cost hit its bottom line.
The biggest cut was made by PublicInvest Research, to RM1.87 from RM2.55 previously, based on a forward price-earnings ratio (PER) of 23 times (at the five-year historical mean) projected earnings per share (EPS) of 8.1 sen for 2023.
The firm cut its forecasts for Hartalega's net profit for FY2023-25 by 26% to 40% to reflect a significantly lower utilisation rate, which stood at 49% in 2QFY2023, and softening ASPs.
The firm said while interest in glove makers returned recently, after the discovery of the XBB sub-variant of the SARS-CoV-2 that appeared to be driving up cases in Malaysia, China and other parts of the world, it still expects ASPs to be weighed down by an imbalance in supply and demand.
"In the near term, Hartalega will focus on further automation of production lines, while maintaining or lowering energy, labour and raw material costs. Despite the near-term headwinds, the long-term outlook for Hartalega remains positive, as glove consumption in emerging markets is expected to increase notably, due to low per capita consumption amid heightened hygiene awareness," it said.
PublicInvest Research kept its "neutral" call on Hartalega.
Meanwhile, Apex Securities Bhd reduced its TP for Hartalega by 24.5% RM1.94 from RM2.57, after lowering its net profit forecasts by 39% to RM207.7 million for FY2023, and by 19% to RM304.8 million for FY2024.
The firm revised its earnings expectations downwards, as glove makers would continue to be buffeted by global headwinds, such as the ongoing Russia-Ukraine war, China's zero-Covid policy and rising inflation, coupled with rising operating cost from higher natural gas and electricity tariffs, as well as the new minimum wage, and continued normalisation of ASPs.
Apex Securities kept its "hold" rating of the stock.
HLIB Research, meanwhile, reduced its TP for Hartalega by 22.9% to RM1.48 from RM1.92 earlier, implying a valuation of 16 times (at 1.5 standard deviations of the pre-pandemic five-year mean) projected 2023 EPS of 9.2 sen.
"We cut our FY2023-25 earnings forecasts by 17% to 45%, as we lower our utilisation rate assumptions, ASP assumptions, as well as recalibrate our ringgit assumptions to be in line with our house views," said its analyst Sophie Chua Siu Li.
She warned that a potential selldown of the stock could occur if Hartalega ends up being excluded from the benchmark FBM KLCI index in the upcoming semi-annual review, as it currently ranks 40th. The index rules state that constituents may be removed if they fall below the 35th spot.
HLIB Research maintained its "sell" call on Hartalega.
CGS-CIMB's Walter Aw, on the other hand, lowered the TP for the glove maker by 8.6%, based on 28 times estimated 2024 PER.
"We upgrade Hartalega to a 'hold' from 'reduce'. While earnings could remain weaker for the second half of FY2023 [compared to a year ago], we think that its current valuation (a 20% discount to the sector) will be supported by long-term industry prospects (upon normalisation of the supply-demand dynamics in the sector), and Hartalega’s leading technology in nitrile glove manufacturing (it has the highest margin in the sector). This is also backed by its strong net cash position
of RM1.8 billion (52 sen a share) as at end-2QFY2023," he noted.
"We expect a pickup in global glove demand and ASPs only from 1QFY2024. In our view, the remaining six months [of FY2023] will be the bottom point for Hartalega in terms of ASPs and demand, as overstocking in the industry dissipates, leading to an improvement in overall supply-demand dynamics in the global glove sector," said Aw.
At the time of writing on Wednesday (Nov 9), Hartalega was the eighth biggest loser on Bursa Malaysia, down nine sen or 4.34% at RM1.98, giving it a market capitalisation of RM6.82 billion.