KUALA LUMPUR (June 15): Some analysts maintained a positive outlook for Hartalega Holdings Bhd but have cut their respective target prices (TPs) on the expectation of lower utilisation rates. The analysts shared that Hartalega’s management had guided the expectation of average selling prices (ASPs) for gloves to increase in 1QFY22 (2QCY21), but decline in 2QFY22
In a note today, Kenanga Research lowered its FY22E net profit by 6.5% to account for lower utilisation rate.
“In our view, the anticipated ASP weakness is already discounted by the share price. Reiterate ‘outperform’ with lower TP from RM15.76 to RM13.80 based on 15x CY22E EPS (earnings per share),” Kenanga noted.
“We highlight that 1QFY22 ASP will continue to show q-o-q (quarter-on-quarter) improvement but subsequently taper in 2QFY22. Due to the over-ordering over the past 15 months, since the pandemic started, the market is currently undergoing a phase of inventory adjustment.
“However, management expects orders to creep up from August 2021 and hence do not expect excessive downwards pricing pressure. Management has guided ASP to taper by 20% in 2QFY22,” it added.
Kenanga Research noted that it still sees “significant value” in Malaysian glove players which command 65-68% of global market share, pointing out that they have consistently evolved and innovated in terms of products and plant modernization via automation.
“In our view, at current price levels, the weakness reflects an overly bearish decline in ASP in subsequent quarters ahead,” it said.
Meanwhile, Hong Leong Investment Bank (HLIB) Research maintained its “buy” call and also lowered its TP to RM13.85 (previously RM13.90) as it factored in lower utilisation rate from the impact of the full movement control order (FMCO) on Hartalega’s operations. HLIB Research in a note today also lowered its FY22 forecasts by 4.9% to account for lower sales volume.
“Hartalega expects ASPs to be slightly higher q-o-q in 1QFY22 but fall 24% in 2QFY22 in line with market prices. Hartalega attributed this to increased competition in the Europe market from a competitor shifting sales from the US to Europe as well as the improving Covid-19 situation in selected countries.
“In line with declining ASPs, Hartalega expects raw material prices to decline in 2HCY21. With regards to sales volumes, Hartalega guided that current restrictions on the manufacturing industry to operate at 60% workforce will translate to a 70% utilisation rate for the duration of the ongoing FMCO,” HLIB Research added.
HLIB Research also noted changes in labour practices at Hartalega.
“Despite issues with hiring local workers (Hartalega shared that local workers have a high turnover rate and 8-10% of the time they are absent from work), Hartalega will continue to try to increase their number of local workers as it has become difficult to hire foreign workers during the Covid-19 pandemic. Part of their efforts to attract local workers is to move to a 60 hour work week (72 hours is the industry standard at the moment),” it added.
