HARTA: Investment Bank Maintains ‘Hold’ Rating, Lowers Target Price Amid Persistent Market Challenges
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM1.08 (-19.4%) |
| Last Traded | RM1.10 |
| Recommendation | HOLD |
A leading investment bank has maintained its ‘Hold’ recommendation on the company, revising its 12-month target price downwards to RM1.08 from RM1.34. This adjustment comes as the company navigates a challenging market, with expectations of largely flattish earnings in the upcoming quarter despite ongoing operational efficiencies.
Operational Performance and Efficiencies
The company demonstrated notable improvements in operational efficiency, driven by continuous automation initiatives at its Next Generation Integrated Glove Manufacturing Complex. These efforts led to a 2% reduction in headcount per million pieces and a 7% decrease in overall manufacturing costs. Plant utilisation also improved sequentially to 70% in 2QFY26 from 67% in 1QFY26, bolstered by firmer US demand. Sales volumes are projected for a modest increase to approximately 6.2 billion pieces in 2QFY26, supported by restocking activity in the US market.
Market Dynamics and Headwinds
Despite easing raw material costs, including a 35% year-on-year drop in nitrile latex prices and a 20% decline in natural rubber, the benefits to margins were limited by persistent Average Selling Price (ASP) competition. ASPs in key markets like the US and Europe remained stable at US$20-21/k and US$19-20/k pieces, respectively. However, Chinese competitors continue to offer lower prices at US$14-15/k, intensifying global pricing pressure.
Furthermore, the company faces a significant challenge from an additional RM101 million tax assessment from the Inland Revenue Board for the years 2016-2022, currently under judicial review, which could reduce its cash balance by 10%. A stronger Malaysian Ringgit against the US Dollar also poses a downside risk, potentially reducing net profit by approximately 18% for every 1% appreciation of the Ringgit.
Future Outlook and Valuation
The near-term outlook for FY26 earnings remains muted due to a persistent global supply glut and currency headwinds. However, the bank anticipates a better earnings trajectory from FY27 onwards, with plant utilisation expected to gradually rise to 80% in FY27E and 85% in FY28E. This recovery is predicated on a rebound in global glove demand, easing inventory overhang, and sustained orders from the US. While the company’s Price-to-Book (P/B) valuation is currently trading at historical trough levels, suggesting that much of the negative sentiment is priced in, its FY26E Price-to-Earnings Ratio remains elevated at 86x. This indicates that the magnitude of earnings recovery is likely to be modest amid slow demand normalisation, persistent pricing pressure, and an elevated cost environment.
Investment Recommendation
The investment bank reiterates its ‘Hold’ rating, lowering the target price to RM1.08 by assigning a lower Price-to-Book (P/BV) multiple of 0.8x. This adjustment reflects an extended sector recovery timeline and the absence of strong near-term catalysts for a meaningful re-rating. Key risks to this recommendation include fluctuations in sales volume, ASP movements, raw material price trends, significant appreciation of the Ringgit against the US Dollar, and aggressive pricing strategies from Chinese glove manufacturers.
