KUALA LUMPUR (Nov 13): The higher average selling prices (ASPs) that lifted Hartalega Holdings Bhd's (KL:HARTA) second-quarter earnings may be difficult to sustain in the coming quarter, as easing crude oil prices threaten to reverse the recent improvement in the rubber glove maker's margins, according to analysts.
In a research note on Friday, Hong Leong Investment Bank Bhd (HLIB) said the outlook was clouded by persistent industry oversupply and mounting cost pressures, including higher natural gas tariffs and the minimum wage increase announced during Budget 2027.
These factors prompted the research house to downgrade Hartalega to “sell” from “hold”, with a lower target price (TP) of 80 sen from 97 sen previously, making it the most bearish among analysts covering the stock.
The downgrade came despite Hartalega reporting a more than threefold increase in net profit of RM102.83 million for the first half of its financial year ending March 31, 2027 (1HFY2027).
“The key difference is the absence of a temporary tailwind that benefited Hartalega earlier: NBR [nitrile butadiene rubber] shortages and cash deposit requirements from NBR suppliers, which temporarily forced smaller and mid-sized players to scale back production and helped alleviate the industry oversupply,” said the research house.
“Without these dynamics, at best, the current ASP hike is more likely to benefit earnings through inventory lag effects.”
It noted that Brent crude oil prices had declined by about 19% since Oct 30, raising the risk of downward ASP revisions from December onwards. Higher natural gas costs are also expected to weigh on margins.
In a separate note, CIMB Investment Bank Bhd (CIMB IB) kept its “hold” call on Hartalega with an unchanged TP of RM1.12, although it expects weaker earnings in the near term.
According to Bloomberg data, 17 analysts are covering Hartalega with three “buy” calls, 12 “hold” recommendations and two “sell” ratings. The 12-month average TP is RM1.14.
CIMB IB expects Hartalega’s third-quarter earnings to decline quarter-on-quarter as selling prices are adjusted to normal levels and higher raw material costs are passed through with some delay.
Currently, the research house noted that Hartalega's ASP had eased to about US$22 per 1,000 pieces, compared with US$26.70 in the second quarter, representing a decline of about 15%.
CIMB IB also cautioned that persistent industry oversupply and pricing pressure from Chinese manufacturers would continue to limit the sector's recovery, keeping selling prices under pressure despite Hartalega's efforts to improve operational efficiency.
AskEdge data shows the company trading at a price-to-earnings ratio of 20.6 times, which is higher than average but at the lower end compared to historical valuations. Its price-to-net asset value ratio is at 0.8 multiples, which is higher than most peers but at its lowest level in recent years.