HARTALEGA HOLDINGS: Challenging outlook remains. Downgrade to SELL.
(HART MK EQUITY, HTHB.KL)
(Downgraded)
Rationale for report: Company Result
Key Data
Price: RM1.37
Fair Value: RM1.00
52-week High/Low: RM4.00/RM1.31
Key Changes
Fair value 🔻
EPS 🔻
| YE to Mar | FY25 | FY26F | FY27F | FY28F |
|---|---|---|---|---|
| Revenue (RM mil) | 2,585.6 | 2,451.4 | 2,725.8 | 2,836.5 |
| Core net profit (RM mil) | 74.6 | 82.3 | 144.4 | 148.2 |
| FD Core EPS (sen) | 2.2 | 2.4 | 4.2 | 4.3 |
| FD Core EPS growth (%) | 79.6 | 10.2 | 75.6 | 2.6 |
| Consensus Net Profit (RM mil) | 137.5 | 205.7 | 250.1 | |
| DPS (sen) | 11.8 | 1.0 | 3.0 | 3.0 |
| PE (x) | 60.4 | 54.8 | 31.2 | 30.4 |
| EV/EBITDA (x) | 14.7 | 58.2 | 27.2 | 16.9 |
| Div yield (%) | 8.9 | 0.8 | 2.3 | 2.3 |
| ROE (%) | 1.7 | 1.9 | 3.3 | 3.3 |
| Net Gearing (%) | nm | nm | nm | nm |
Stock and Financial Data
Shares Outstanding (million): 3,415.6
Market Cap (RMmil): 4,508.6
Book Value (RM/Share): 1.26
P/BV (x): 1.0
ROE (%): 1.7
Net Gearing (%): –
Major Shareholders
Hartalega Industries S/B (34.4%)
Budi Tenggara S/B (8.6%)
KWAP (6.4%)
Free Float:
0.4
Avg Daily Value (RMmil):
11.6
| Price performance | 3mth | 6mth | 12mth |
|---|---|---|---|
| Absolute (%) | (39.7) | (62.5) | (45.3) |
| Relative (%) | (39.7) | (61.6) | (45.4) |
Investment Highlights
Downgrade to SELL with a lower TP of RM1.00 (from RM2.30 previously) based on a 0.8x CY26F P/B ratio following a sharp earnings reduction due to earnings miss. Hartalega reported core net losses of RM0.2mil, which was a significant miss. The underperformance was mainly attributed to weak ASP and sales volume, impacted by frontloaded orders in the US market. The outlook remains bleak, as structural glove oversupply continues to limit manufacturers’ ability to raise ASP meaningfully in the near term, despite a potential recovery in the sales volume in the upcoming quarters. Additionally, Hartalega is facing a rising cost environment, particularly from the hike in minimum wage. In response to the challenging operating landscape, Hartalega is actively seeking to optimise its cost structure which includes rightsizing its workforce to weather the storm. Furthermore, Hartalega received a Notice of Additional Assessments from IRB totalling RM101.3mil, equivalent to RM0.03/share or c.10% of its net cash position.
- Downgrade to SELL with lower TP of RM1.00 (from RM2.30 previously) based on 0.8x CY26F P/B ratio post earnings cut. We changed our valuation method as it better reflects the company’s underlying fundamentals. The 0.8x P/B target is justified by its low ROE of 3.3%. Following weaker-than-expected 1QFY26 results, we have cut our earnings forecast for FY26F/FY27F by 76%/72% respectively and have introduced our FY28F forecast (refer to Exhibit 2).
- Earnings miss due to weak ASP and sales volume. Hartalega 1QFY26 core net losses came in below expectations. Frontloaded volumes negatively impacted ASP and sale during the quarter. ASP in MYR term declined by 6.7% QoQ and 5.0% YoY while sales volume fell 3.1% QoQ and 0.2% YoY.
- Volume to rise, but ASP to remain flattish. Sales volume is expected to recover as stock depletion from frontloading activities (which occurred at end-CY2024) normalises. However, ASP is likely to remain flat due to the ongoing structural oversupply, which continues to erode pricing power for glove manufacturers. We only expect market equilibrium by 2027, based on our estimates.
- Additional tax assessments. Hartalega received a Notice of Additional Assessments from Inland Revenue Board (IRB) amounting to RM101.3mil for the years from 2017 to 2022, equivalent to RM0.03/share or c.10% of its net cash position. The company is currently seeking legal advice and evaluating legal option which include initiating a formal appeal to the IRB.
EXHIBIT 1: 1QFY26 EARNINGS SUMMARY
| FYE Mar (RM mil) | 1QFY25 | 4QFY25 | 1QFY26 | QoQ (%) | YoY (%) |
|---|---|---|---|---|---|
| Turnover | 583.8 | 611.5 | 553.1 | -9.6 | -5.3 |
| Operating costs | -519.8 | -560.9 | -545.4 | -2.8 | 4.9 |
| EBITDA | 64.1 | 50.7 | 48.0 | -5.3 | -25.1 |
| Depreciation | -34.2 | -40.8 | -40.5 | -0.8 | 18.6 |
| EBIT | 29.9 | 9.8 | 7.5 | -23.8 | -74.9 |
| Net interest | 11.2 | 7.8 | 6.8 | -12.4 | -39.0 |
| -Interest expense | -1.0 | -0.1 | -0.1 | -43.0 | -91.8 |
| -Interest income | 12.2 | 8.0 | 6.9 | -13.0 | -43.5 |
| PBT | 41.1 | 17.6 | 14.3 | -18.8 | -65.2 |
| Tax | -9.2 | -3.0 | -2.0 | -34.4 | -78.4 |
| MI | 0.0 | -0.1 | 0.3 | nm | nm |
| Net Profit | 31.9 | 14.5 | 12.6 | -12.9 | -60.5 |
| Exceptional item | 4.8 | -2.5 | -12.8 | nm | nm |
| Core Net Profit | 36.7 | 12.0 | -0.2 | nm | nm |
| EPS (sen) | 1.1 | 0.4 | 0.0 | nm | nm |
| DPS (sen) | 0.4 | 0.0 | 0.0 | nm | nm |
| BV/share (RM) | 1.4 | 1.3 | 1.3 | 0.8 | -6.7 |
| Cash | 1,388.0 | 923.1 | 995.8 | 7.9 | -28.3 |
| Borrowings | 45.5 | 4.1 | 6.5 | 61.5 | -85.6 |
| Equity ex MI | 4,679.1 | 4,322.3 | 4,336.8 | 0.3 | -7.3 |
| Net cash/(debt) | 1,342.5 | 919.1 | 989.2 | 7.6 | -26.3 |
| EBITDA margin (%) | 11.0 | 8.3 | 8.7 | 0.4ppt | -2.3ppt |
| Pretax margin (%) | 7.0 | 2.9 | 2.6 | -0.3ppt | -4.5ppt |
| Effective tax rate (%) | 22.4 | 17.2 | 13.9 | -3.3ppt | -8.6ppt |
| Net profit margin (%) | 6.3 | 2.0 | 0.0 | -2.0ppt | -6.3ppt |
| Estimated ASP (RM/000) | 98.6 | 100.4 | 93.7 | -6.7 | -5.0 |
| Sales volume (mil) | 5,919.0 | 6,093.0 | 5,906.0 | -3.1 | -0.2 |
| Utilisation rate (%) | 77.5 | 69.0 | 66.9 | -2.1ppt | -10.6ppt |
Source: Company, AmInvestment Bank Bhd
Company profile
Hartalega Holdings Berhad’s business mainly comprises the manufacturing and sale of nitrile gloves with a total capacity of 37 billion pieces per annum. Its manufacturing factories are solely in Malaysia. Its key markets are North America, Europe and Asia which contributed to 48%, 22% and 19% to FY24 revenue. The company offers its products for healthcare, dental, food, industrial, veterinary, spa and beauty salon markets. Hartalega Holdings Berhad was founded in 1988 and is based in Kuala Lumpur, Malaysia.
Investment thesis and catalysts
We have a SELL recommendation on the stock as structural gloves oversupply situation will limit gloves players’ pricing power, notwithstanding Chinese gloves manufacturers’ expansion outside of China which will exacerbate the current oversupply situation. Apart from that, rising operating costs on the back of additional EPF contribution for foreign workers will further affect the company’s profitability.
Valuation methodology
The stock is valued based on target CY26F PB of 0.8x, which is justified by its low ROE of 3.3%.
Risk factors
Upside risks to our estimates include higher than expected glove demand, Chinese players begin scaling back their production, the imposition of tariffs is based on country of incorporation instead of country of origin.
EXHIBIT 2: CHANGE IN EARNINGS
| RMmil | FY26F | FY27F | FY28F | |||||
|---|---|---|---|---|---|---|---|---|
| Old | New | % | New | Old | % | New | % | |
| Revenue | 3,004.0 | 2,451.4 | -18% | 3,649.8 | 2,725.8 | -25% | 2,836.5 | New |
| Earnings | 344.1 | 82.3 | -76% | 520.6 | 144.4 | -72% | 148.2 | New |
| ASP (USD/carton) | 24.5 | 21.7 | -11% | 26.5 | 22.0 | -17% | 22.0 | New |
| Volume (bil volume) | 27.2 | 26.3 | -3% | 30.6 | 28.8 | -6% | 30.0 | New |
EXHIBIT 3: VALUATIONS
| Target PB (x) | 0.8x |
| CY26 BVPS | 1.30 |
| ESG premium | 0% |
| 12-month target price | 1.00 |
EXHIBIT 4: PB BAND CHART
The PB Band Chart shows historical Price-to-Book value ratios with standard deviation bands.
- +2SD: 9.1x
- +1SD: 6.5x
- Mean: 4.0x
- -1SD: 1.4x
- -2SD: -1.1x
Source: Bloomberg
EXHIBIT 5: ESG RATING
| ESG / Parameters | Weightage | Rating | Rationale | |
|---|---|---|---|---|
| Environmental assessment | ||||
| 1 | Carbon emissions reduction | 15% | * | 0.022 tonnes CO2 per 1,000 pieces of gloves in 2025, slight reduction since FY23. |
| 2 | Scope 1 GHG Emissions | 15% | * | 28% increase from 2024 |
| 3 | Scope 2 GHG Emissions | 15% | * | 5.4% increase YoY, which is good considering sales increased 41% |
| 4 | Scope 3 GHG Emissions | 15% | * | Started tracking since 2023, down 7.4% |
| 5 | Environmental management | 20% | * | Maintained ISO 14001:2015 certification for our environmental management system, providing a robust framework to monitor energy use, emissions, water consumption and waste management. |
| 6 | Waste generation | 20% | * | 74% of waste generated was diverted from landfills for recycling. Non-hazardous waste generation also decreased 7% despite higher production volume. |
| Weighted score for environmental assessment | 100% | * | ||
| Social assessment | ||||
| 1 | Health, safety & well-being | 25% | * | All facilities in NGC remained ISO 45001:2018 – Occupational Health and Safety Management Systems (OHSMS) certified. Recorded a 17% decrease in work-related injuries. Reached an eight-year low in Lost Time Injury. Frequency Rate, at 0.21. |
| 2 | Employee turnover | 25% | * | 30.5% in FY25 |
| 3 | Women in workforce | 25% | * | 16% of workforce. |
| 4 | CSR programmes | 25% | * | 39,294 individuals benefitted from their social impact efforts, including 12,547 through Yayasan Hartalega and 26,747 via their other dedicated CSR programmes |
| Weighted score for social assessment | 100% | * | ||
| Governance assessment | ||||
| 1 | Board age diversity | 20% | * | 38% |
| 2 | Board women representation | 20% | * | 30% representation |
| 3 | Independent board directors | 20% | * | 50% – independent non-exec |
| 4 | Directors remuneration | 20% | * | 2% |
| 5 | Corruption investigations | 20% | * | 3 Confirmed incidents of corruption and action taken in FY25 |
| Weighted score for governance assessment | 100% | * | ||
| Environmental score | 35% | * | ||
| Social score | 35% | * | ||
| Governance score | 30% | * | ||
| Overall ESG Score | 100% | * | ||
Source: AmInvestment Bank Bhd
EXHIBIT 6: FINANCIAL DATA
| Income Statement (RMmil, YE 31 Mar) | FY24 | FY25 | FY26F | FY27F | FY28F |
|---|---|---|---|---|---|
| Revenue | 1,838.1 | 2,585.6 | 2,451.4 | 2,725.8 | 2,836.5 |
| EBITDA | 155.7 | 244.3 | 61.9 | 137.0 | 229.1 |
| Depreciation/Amortisation | (132.0) | (142.0) | (160.9) | (152.2) | (144.2) |
| Operating income (EBIT) | 23.6 | 102.2 | (99.1) | (15.2) | 84.9 |
| Other income & associates | |||||
| Net interest | 53.0 | 40.0 | 40.0 | 40.0 | 40.0 |
| Exceptional items | 28.8 | 0.1 | |||
| Pretax profit | 38.7 | 47.9 | 107.1 | 184.3 | 193.0 |
| Taxation | (18.7) | 26.5 | (23.0) | (39.6) | (41.5) |
| Minorities/pref dividends | (7.3) | 0.1 | (1.8) | (0.3) | (3.3) |
| Net profit | 12.7 | 74.5 | 82.3 | 144.4 | 148.2 |
| Core net profit | 41.6 | 74.6 | 82.3 | 144.4 | 148.2 |
| Balance Sheet (RMmil, YE 31 Mar) | FY24 | FY25 | FY26F | FY27F | FY28F |
|---|---|---|---|---|---|
| Fixed assets | 1,901.0 | 2,573.1 | 2,433.5 | 2,305.9 | 2,187.0 |
| Intangible assets | 45.2 | 38.3 | 38.3 | 38.3 | 38.3 |
| Other long-term assets | 1,031.2 | 404.4 | 644.7 | 892.4 | 1,164.1 |
| Total non-current assets | 2,977.4 | 3,015.9 | 3,116.5 | 3,236.6 | 3,389.5 |
| Cash & equivalent | 1,427.4 | 923.1 | 933.5 | 817.6 | 727.7 |
| Stock | 385.7 | 338.4 | 320.8 | 356.7 | 371.2 |
| Trade debtors | 386.3 | 385.6 | 365.6 | 406.5 | 423.0 |
| Other current assets | 80.5 | 77.1 | 79.6 | 79.6 | 79.6 |
| Total current assets | 2,279.9 | 1,724.2 | 1,699.5 | 1,660.4 | 1,601.5 |
| Trade creditors | 63.1 | 229.6 | 234.3 | 253.8 | 255.6 |
| Short-term borrowings | 62.3 | 4.1 | 13.7 | 25.3 | 51.1 |
| Other current liabilities | 259.1 | 8.6 | 8.6 | 8.6 | 8.6 |
| Total current liabilities | 384.5 | 242.2 | 256.6 | 287.7 | 315.3 |
| Long-term borrowings | 4.3 | 9.1 | 16.8 | 34.0 | |
| Other long-term liabilities | 224.0 | 181.4 | 181.4 | 181.4 | 181.4 |
| Total long-term liabilities | 228.3 | 181.4 | 190.5 | 198.2 | 215.5 |
| Shareholders’ funds | 4,648.0 | 4,322.3 | 4,370.4 | 4,412.3 | 4,458.1 |
| Minority interests | (3.4) | (3.3) | (1.5) | (1.2) | 2.1 |
| BV/share (RM) | 1.36 | 1.26 | 1.28 | 1.29 | 1.31 |
| Cash Flow (RMmil, YE 31 Mar) | FY24 | FY25 | FY26F | FY27F | FY28F |
|---|---|---|---|---|---|
| Pretax profit | 38.7 | 47.9 | 107.1 | 184.3 | 193.0 |
| Depreciation/Amortisation | 132.0 | 142.0 | 160.9 | 152.2 | 144.2 |
| Net change in working capital | (405.8) | (50.8) | 42.3 | (57.3) | (29.2) |
| Others | 177.1 | (26.5) | (23.0) | (39.6) | (41.5) |
| Cash flow from operations | (58.0) | 112.6 | 287.3 | 239.6 | 266.6 |
| Capital expenditure | (158.3) | (192.8) | (261.6) | (272.3) | (297.1) |
| Net investments & sale of fixed assets | |||||
| Others | 24.8 | 14.3 | |||
| Cash flow from investing | (133.4) | (178.5) | (261.6) | (272.3) | (297.1) |
| Debt raised/(repaid) | (102.4) | (65.8) | 18.8 | 19.3 | 43.0 |
| Equity raised/(repaid) | |||||
| Dividends paid | (401.4) | (34.2) | (102.5) | (102.5) | |
| Others | (9.0) | ||||
| Cash flow from financing | (111.4) | (467.2) | (15.4) | (83.2) | (59.4) |
| Net cash flow | (302.8) | (533.0) | 10.4 | (115.9) | (90.0) |
| Net cash/(debt) b/f | 1,724.5 | 1,427.4 | 923.1 | 933.5 | 817.6 |
| Net cash/(debt) c/f | 1,427.4 | 885.9 | 933.5 | 817.6 | 727.7 |
| Key Ratios (YE 31 Mar) | FY24 | FY25 | FY26F | FY27F | FY28F |
|---|---|---|---|---|---|
| Revenue growth (%) | (23.7) | 40.7 | (5.2) | 11.2 | 4.1 |
| EBITDA growth (%) | (51.2) | 56.9 | (74.7) | 121.5 | 67.2 |
| Pretax margin (%) | 2.1 | 1.9 | 4.4 | 6.8 | 6.8 |
| Net profit margin (%) | 0.7 | 2.9 | 3.4 | 5.3 | 5.2 |
| Interest cover (x) | nm | nm | nm | nm | nm |
| Effective tax rate (%) | 48.2 | 55.2 | 21.5 | 21.5 | 21.5 |
| Dividend payout (%) | 538.9 | 41.5 | 71.0 | 69.1 | |
| Debtors turnover (days) | 70 | 54 | 56 | 52 | 53 |
| Stock turnover (days) | 61 | 51 | 49 | 45 | 47 |
| Creditors turnover (days) | 31 | 21 | 35 | 33 | 33 |
Source: Company, AmInvestment Bank Bhd estimates
DISCLOSURE AND DISCLAIMER
This report is prepared for information purposes only and it is issued by AmInvestment Bank Berhad (“AmInvestment”) without regard to your individual financial circumstances and objectives. Nothing in this report shall constitute an offer to sell, warranty, representation, recommendation, legal, accounting or tax advice, solicitation or expression of views to influence any one to buy or sell any real estate, securities, stocks, foreign exchange, futures or investment products. AmInvestment recommends that you evaluate a particular investment or strategy based on your individual circumstances and objectives and/or seek financial, legal or other advice on the appropriateness of the particular investment or strategy.
The information in this report was obtained or derived from sources that AmInvestment believes are reliable and correct at the time of issue. While all reasonable care has been taken to ensure that the stated facts are accurate and views are fair and reasonable, AmInvestment has not independently verified the information and does not warrant or represent that they are accurate, adequate, complete or up-to-date and they should not be relied upon as such. All information included in this report constitute AmInvestment’s views as of this date and are subject to change without notice. Notwithstanding that, AmInvestment has no obligation to update its opinion or information in this report. Facts and views presented in this report may not reflect the views of or information known to other business units of AmInvestment’s affiliates and/or related corporations (collectively, “AmBank Group”).
This report is prepared for the clients of AmBank Group and it cannot be altered, copied, reproduced, distributed or republished for any purpose without AmInvestment’s prior written consent. AmInvestment, AmBank Group and its respective directors, officers, employees and agents (“Relevant Person”) accept no liability whatsoever for any direct, indirect or consequential losses, loss of profits and/or damages arising from the use or reliance of this report and/or further communications given in relation to this report. Any such responsibility is hereby expressly disclaimed.
AmInvestment is not acting as your advisor and does not owe you any fiduciary duties in connection with this report. The Relevant Person may provide services to any company and affiliates of such companies in or related to the securities or products and/or may trade or otherwise effect transactions for their own account or the accounts of their customers which may give rise to real or potential conflicts of interest.
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