Rising raw material prices to affect Hartalega

PETALING JAYA: The worst is not over for Hartalega Holdings Bhd as soaring raw material costs and uncertainty of the rubber gloves selling prices may impact its margins this year.

Several research houses have cut their earnings forecast on the world’s largest nitrile glove producer, amid a challenging environment for the industry.

CGS-CIMB Research has lowered its forecast on Hartalega’s earnings per share (EPS) for financial year 2023 (FY23) and FY24 by 13.9% and 17.3%, respectively, despite expecting higher sales volume.

It said the higher costs of raw materials, increase in minimum wage, and increasing electricity and natural gas tariffs could impact Hartalega’s bottom line.

“Overall, we expect Hartalega to post an 84% year-on-year (y-o-y) dip in FY23 forecast net profit before returning to an upward earnings growth trajectory of 10.6% y-o-y and 10.7% y-o-y in FY24 and FY25 respectively,” it said in a report yesterday.

The research house expected the average selling price (ASP) of gloves to bottom in the current quarter, declining by 5% to 7% quarter-on-quarter to US$25-US$27 (RM109.46-RM118.22) per 1,000 pieces.

But, it would not be sufficient to recover Hartalega’s margins in FY23 due to the soaring raw material costs.

However, the decline in Hartalega’s earnings could be capped in subsequent quarters given that the ASPS have returned to more reasonable levels, according to Kenanga Research.

“We like Hartalega due to its solid management and margins which are head and shoulders above its peers.

“Since the ASPS are no longer lofty, expectations of disappointments in subsequent quarters are expected to be capped,” it said.

It downgraded its forecast on Hartalega’s FY23 net profit by 16% after taking into account the reduction in ASP from US$26 (RM113.84) to US$25 (RM109.46) per 1,000 pieces.

Interestingly, the research house expected the ASP to inch up from June due to higher operating cost, including the increase in minimum wage payments.

Kenanga Research also expected Hartalega to look for potential merger and acquisitions on the back of its cash position of Rm2.4bil.

Hartalega posted its first-ever quarterly loss in the fourth quarter ended March 31, largely due to a provision for Cukai Makmur or prosperity tax.

It reported a loss of Rm189.7mil for the quarter, compared with a net profit of Rm1.12bil in the same quarter a year ago, on the back of a 58% decline in revenue to Rm968.69mil from Rm2.3bil previously.

UOB Kay Hian Research said Hartalega’s results were within the market consensus.

“Had it not been for the prosperity tax, Hartalega would have registered a profit of Rm170mil,” it said.

Meanwhile, MIDF Research has revised its FY23 earnings forecast for Hartalega downward by 21% to Rm755.8mil to reflect the higher social compliance and operating costs due to the implementation of the new minimum wage policy and currency conversion cost of raw materials as highlighted by the management.

“The lower revenue can be attributed to declining ASP due to the surge in global glove supplies. However, this was mitigated by the rise in sales volume by 9%,” it said.