(Aug 7): Hartalega Holdings Bhd’s (KL:HARTA) upcoming quarters will likely be stronger following signs of further demand improvement in the January-March quarter, analysts said.

Core net profit of RM37 million in the three months ended June 2024 (1QFY2024) accounted for only 19% of consensus’ full-year estimate. However, at least four research houses upgraded their call on Hartalega to "buy" on Wednesday, betting that earnings may catch up with estimates as sales pick up.

“We are positive on Hartalega's outlook, driven by sequential improvements in sales volume as customers continue to restock their depleting inventories,” said Public Investment Bank which raised its rating on Hartalega to "outperform" from "neutral".

There are now a wide majority of 12 out of 22 research houses with ‘buy’ recommendations on the stock while six are on "hold" and four on "sell" ratings. The consensus 12-month target price is RM3.13, a potential return of 14% from its last price.

Share price of Hartalega has been volatile since the start of 2024, racking up as much as 42% up until May 15 when US announced new tariffs on Chinese glove imports, before surrendering nearly all of gains in a six-day selldown that began on July 29.

“We think its stock re-rating is warranted, based on a gradual uptick in market dynamics,” said RHB Investment Bank. The house kept its "buy" call, citing stronger quarters ahead propelled by a pick-up in order replenishments, cost pass-through, and easing costs.

A cycle to clear out inventory is coming to an end while a 29% year-on-year increase in glove exports in April-June also improved order visibility, RHB noted. Further, excess capacity in the industry is also gradually dissipating, which would balance supply and demand by December, it said.

MIDF Amanah Investment Bank, however, disagreed, flagging that “there is still excess capacity in the market” and downgraded its recommendation to "neutral" from "buy".

Hartalega may be sacrificing margin and the glut may prompt the company to be “more competitive in its pricing as there seems to be little room for the group to pass on rising costs to the customer,” MIDF said, warning that profit margin will likely stay below 10% “in the foreseeable term”.

On Wednesday, the company reported a net profit of RM31.9 million, or 0.94 sen per share, for 1QFY2024, a turnaround from a net loss of RM52.5 million loss recorded in the previous financial year’s corresponding quarter.

Revenue for the quarter rose by 33% to RM584 million from RM440 million recorded in 1QFY2023.