KUALA LUMPUR: Hong Leong Investment Bank (HLIB) Research has lowered its earnings forecasts for Hartalega Holdings Bhd for financial year 2023 (FY23), FY24 and FY25 to RM108.2 million, -RM74.3 million and RM124.2 million to take into account the higher costs that are expected to come in coming months.
The firm noted Hartalega's third quarter (Q3) FY23 core lossesI of RM25.1 million which pushed its nine-month earnings to RM133.3m was below its estimated 62 per cent.
It however was above consensus' estimates at 84 per cent.
"The weak showing was a result of soft ASPs, subdued utilisation rates and inability to fully pass on higher costs," it said in a note.
Stiff competition resulted in revenue falling 54.1 per cent year-on-year (YoY), as average selling prices and sales volume continued to decline further.
Year-to-date, Hartalega's revenue tumbled 72.7 per cent on sharp ASP and sales volume (down 26.7 percent) declined, as buyers continue to draw down on its existing stockpile.
"Benefitting from the Chinese players' plant closure for Chinese New Year festive and China's Covid spike, Hartalega saw an uptick in glove orders and expects sales volume to be stronger quarter-on-quarter in Q4 FY2023.
"However, it is still too premature to conclude that the industry is recovering from its trough, as buyers' purchasing patterns have remained relatively erratic," it said.
It added while Hartalega will also attempt to pass on part of the cost increase to buyers, the firm do not think that the industry is out of the woods yet, as the demand-supply mismatch persists, ASP revision likely to be small, and costs are expected to increase further (mainly fuel costs and electricity costs).
It maintained a "Sell" call on the stock with a lower target price of RM1.28 from RM1.48 previously.
"Considering that we are expecting Hartalega to report losses in the upcoming quarters, we deem the price-to-earnings valuation method no longer feasible, hence we are changing our valuation method to a price-to-book (P.B)based methodology instead.
"We value Hartalega based on a P/B multiple of 0.87 times on a FY24f book value per share of RM1.47," it added.