HLIB Has "Uncertain Outlook" View On Hartalega

BusinessToday

3 days ago

Hartalega Holdings Berhad reported a core Profit After Tax and Minority Interest (PATMI) of RM12.2 million for the first quarter of its financial year 2026 (1QFY26), a 7.0% increase quarter-on-quarter (QoQ) but a significant 72.7% drop year-on-year (YoY). While these results were broadly in line with HLIB Research's expectations, they fell short of consensus forecasts.
The 1QFY26 core PATMI was calculated after excluding extraordinary items of RM0.4 million, which included gains from property, plant, and equipment disposal, fair value gains on derivatives, and a reversal of allowance for expected credit loss (ECL) on trade receivables. These positive adjustments were partially offset by RM15.4 million in realized and unrealized forex losses. No dividends were declared for the quarter.
Revenue Decline Despite Cost Controls
Hartalega's revenue declined by 9.6% QoQ, primarily due to a 3.1% drop in sales volume and a 6.7% decrease in average selling prices (ASP) in Ringgit terms. The lower sales volume was attributed to front-loading activities by US customers in 3QFY25, potential transhipment activities via Vietnam, Thailand, and Indonesia, and intense competition from Chinese players in non-US markets. The weaker ASP was a result of competitive pricing by regional players amid subdued demand, a 3.2% depreciation of the US Dollar against the Ringgit, and a 3.3% decline in NBR prices.
Despite the revenue contraction, core PATMI improved QoQ, boosted by lower operating costs stemming from ongoing automation initiatives and headcount rightsizing. On a YoY basis, revenue decreased by 5.3%, with core PATMI dipping at a greater pace due to negative operating leverage, lower net interest income, and higher depreciation expenses.
Outlook and Strategic Initiatives
During its recent briefing, HLIB said Hartalega expressed continued concern over the industry's supply-demand equilibrium, now projecting a potential delay in rebalancing from 2026 to 2029. To maintain competitiveness, the company plans to invest RM200-300 million over the next 9-15 months in automation and energy efficiency enhancements. These initiatives include revamping glove stripping machines, installing AI-driven vision inspection systems, and modifying production lines for better energy and chemical efficiency.
For 2QFY26, Hartalega aims to deliver approximately 2.2 billion pieces per month, an increase of about 12% QoQ, driven by an anticipated pickup in orders from US customers starting in August 2025. Group blended ASP is expected to remain flat QoQ, with the weakness in generic medical nitrile rubber gloves offset by a shift towards more premium products. Input costs for NBR are expected to be flat, while natural gas tariffs are projected to decline by 1.5% QoQ.
Tax Bill and Financial Position
Separately, Hartalega announced it received additional tax bills from the Inland Revenue Board (IRB) amounting to RM101 million (RM0.03 per share or 2.2% of market cap) for the years 2017-2022. The company is currently seeking legal advice and evaluating options, including initiating a formal appeal. Despite this, Hartalega maintains a strong financial position with a net cash balance of RM986 million (or RM0.29/share) as of 1QFY26, providing financial flexibility.
HLIB Research is maintaining its FY26 forecasts but has cut its FY27 forecasts by 13.5% to reflect a more uncertain outlook. They are introducing an FY28 core PATMI forecast of RM243.8 million. The research house reiterated its 'Hold' recommendation on Hartalega, with a lower target price of RM1.32 (down from RM1.48).