PETALING JAYA: Hartalega Holdings Bhd’s earnings in the first quarter (Q1) of financial year 2022 (FY22) triumphed analysts’ expectations on the back of higher sales volume and average selling prices (ASPs).
However, with ASPs trending downwards following encouraging global vaccination rates, the glove maker may post weaker results in the remaining quarters, even after factoring in Delta variant-driven demand.
Loss of market share and the lack of visibility concerning post-pandemic demand-supply dynamics are also weighing on glove stocks on Bursa Malaysia, including Hartalega.
AmInvestment Bank said the weakening investor sentiment is expected to keep a lid on Hartalega’s share price in the next six months, despite its attractive valuations.
According to the research firm, local glove players are currently trading at price-earnings (PE) ratios of 13-18 times of FY22 forecast earnings per share (EPS) versus the pre-pandemic values in the above 20 times range.
Hartalega gloves
On Tuesday, Hartalega reported its best-ever quarterly revenue of RM3.9bil, which was an increase of 70% quarter-on-quarter (q-o-q) due to strong ASP and utilisation rate of 96%. Net profit for the Q1 of FY22 was RM2.26bil, a rise of 102% q-o-q.
Following a post-results briefing with management, the research firm said Hartalega expects a 30% q-o-q decline in ASP in Q2 at around US$66 (RM279.05) per 1,000 pieces.
“Following the trend of market prices, we believe that Hartalega’s ASP may drop to an average of US$40 (RM169.12) to US$45 (RM190.26) per 1,000 pieces by Q3.
The group is expecting nitrile gloves to be priced at US$30 (RM126.84) to US$35 (RM147.98) per 1,000 pieces post-pandemic, which is in line with our projections,” it said in a note yesterday.
Local glove makers are also losing market share to Chinese companies due to frequent production disruptions because of movement restrictions.
Hartalega, according to the research firm, predicts that it may take two years to regain consumer confidence considering that it may not be able to fully utilise its production capacity for at least one year.
Where production is concerned, it expects disruptions to continue.
“We expect Hartalega to report a 60% utilisation rate in the following quarter. Factories are currently performing at 70% utilisation rate under the movement control order’s (MCO) 60% workforce restrictions.
“This is further exacerbated by the enhanced MCO, which resulted in over 95% of production being closed for two weeks,” AmInvestment Bank added.
Meanwhile, PublicInvest Research has lowered its earnings forecast for FY22-FY24 by 2%-22%, as the ASPs are declining at a faster-than-expected pace.
It has also subsequently lowered the stock’s target price to RM7.80, implying a PE multiple of 26 times (at its pre-Covid five-year historical mean) on 2023 forecast EPS of 30.5 sen per share.
The research outfit said it maintained an “outperform” rating on Hartalega for its superior margins during pre-pandemic times.
AmInvestment Bank, on the other hand, maintains a “hold” call with an unchanged fair value of RM6.87 per share.
Notwithstanding Hartalega’s stellar Q1 results, rising competition in the coming quarters has gotten a mixed reaction from analysts in their future earnings forecasts and target prices, if reports issued yesterday were anything to go by.
While there were a fair number of “hold” calls, MIDF Research has upgraded the stock to a “buy”, from “neutral” previously.
It said looking beyond the near-term fluctuation, the group’s fundamentals remain intact.
“We think that Hartalega is steadfast in maintaining its market share particularly in the nitrile gloves segment through its operational processes and product reliability.
“Its business ambitions are supported by its calculated expansion plan, healthy cashflow and robust balance sheet with a net cash of around RM3bil,” said MIDF.
It has kept the target price unchanged at RM8.40.