Hartalega’s 3QFY24 affected by Red Sea crisis but analysts still expect brighter 4QFY24
KUCHING: Glove manufacturer Hartalega Holdings Bhd’s (Hartalega) third quarter of financial year 2024 (3QFY24) results have been negatively affected by the ongoing Red Sea crisis which caused shipment delays and affected the group’s demand recovery momentum.
In a company report, analysts at AmInvestment Bank Bhd (AmInvestment Bank) reported that Hartalega’s 3QFY24 core net profit (CNP) had come in at a meagre RM0.7 profit, translating to a 97.4 per cent quarter over quarter (q-o-q) contraction.
Cumulatively, this brought the group’s first nine months (9M) of FY24 CNP to RM28.3 million, a 73.6 per cent year on year (y-o-y) decrease.
Note that these results reflects an exclusion of a oneoff severance payment of RM47 million in 1QFY24 and a RM20 million reversal of compensation in 3QFY24.
The analyst said that the earnings during the period had missed their expectations as the ongoing Red Sea crisis had caused several shipment delays that impacted 600 million pcs of gloves or 13 per cent of the group’s 3QFY24 sales volume.
Assuming 3QFY24 average selling prices (ASPs) and cost structure of US$19 to US$20 per 1,000 pieces and variable costs at 40 per cent of revenue, AmInvestment Bank opines that the profit before tax (PBT) loss Hartalega had experienced from these shipping disruptions to be around RM30 million.
Consequently, Hartalega’s plant utilisation (PU) rate remained flattish at 43 per cent, causing less favourable economies of scale.
The research arm of Maybank Investment Bank Bhd (Maybank Research) reported that Hartalega’s PU rate would have grown to a more favourable 48.5 per cent if not for the disruption of shipments from the Red Sea crisis.
Additionally, lower sequential ASPs of 7 per cent and higher raw material prices of 12 per cent further dragged the group’s earnings during the period to its current breakeven position and severely hindered its demand recovery in 3QFY24.
“Hartalega’s 3QFY24 ASP was US$19 to US$20 per 1,000 pieces compared to US$21 to US$22 per 1,000 pieces in 2QFY24.
The decrease was primarily due to pricing pressure from Chinese players despite rising raw material prices,” said the AmInvestment Bank.
Looking ahead, both analysts are expecting a brighter earnings outlook for Hartalega in its 4QFY24 that will be supported by higher ASPs to pass on its higher input costs of energy and raw materials, and higher sales and plant utilisation rates.
Should the group fail to do so, Maybank Research said cost savings and efficiency gains from its Bestari Jaya facilities decommission should help to defend its current operating margins.
And barring any unforeseen disruptions from the current Red Sea crisis, Hartalega’s management is anticipating a better plant utilisation rate in 4QFY24 and are targeting to increase their sales volume by 10 per cent from 4.5 billion pcs in 3QFY24 to 5 billion pcs.
According to AmInvestment Bank, this target is consistent with other Malaysian glove makers in 4QFY24 and is expected to be supported by replenishing activities from customers as they begin facing depleting inventories.
To reflect the negative impact of the Red Sea crisis to their forecasts, AmInvestment Bank cut its forecasted FY24 CNP by 34 per cent to RM62 million while still maintaining their FY25 and FY26 CNP forecasts of RM263.4 million and RM405.9 million, respectively.