This article first appeared in Capital, The Edge Malaysia Weekly on February 13, 2023 - February 19, 2023

Target price: RM1.70 HOLD

CGS-CIMB (FEB 7): Hartalega posted a core net loss of RM28.2 million for 3QFY23, bringing the cumulative 9MFY23 core net profit to RM88.1 million (-97.4% year on year). This was a negative surprise, one that we attribute to weaker-than-expected sales volume and lower average selling prices (ASPs) that continued to persist during the quarter. No dividend was declared, as expected. 3QFY23 revenue fell 21% quarter on quarter (q-o-q), and it recorded a core net loss of RM28.2 million (2QFY23: RM28.3 million core net profit). This was due to: (1) lower sales volume (-13.9% q-o-q); (2) further decline in ASPs (-8.3% q-o-q; 3QFY23 ASP: US$23 per 1,000 pieces); and (3) lower economies of scale. We gather that global glove demand remains weak post-pandemic due to the normalisation of global glove usage and a supply glut from excess capacities in the sector. On top of that, margins continued to be affected by higher energy costs (natural gas tariffs rose 25% q-o-q), with 3QFY23 Ebitda margin down 10.7 percentage points q-o-q.

We expect Hartalega to post wider q-o-q losses in 4QFY23F, thanks to a decline in ASPs q-o-q despite rising costs (a rise in natural gas and electricity tariffs). On a positive note, Hartalega thinks its sales volume should improve q-o-q from better global demand though it expects the utilisation rate to stay subpar versus pre-Covid-19 levels of more than 85%. However, we are of the view that the company should potentially see its losses bottom in 1QFY24F (previous forecast: 4QFY23F).

We cut our FY23 to FY25F earnings per share (EPS) forecasts to account for weaker ASPs and sales volume assumptions. However, we keep our “hold” call with a lower target price of RM1.70 (28 times CY24F PER, in line with the five-year mean). Though we see a weak near-term earnings outlook for Hartalega, its valuation (currently on a par with the sector average) will be supported by long-term industry prospects (upon normalisation of sector supply-demand dynamics) and its leading technology in nitrile glove manufacturing (the highest margins in the sector).

Target price: RM1.86 BUY

RHB RESEARCH (FEB 8): In view of the normalisation of freight rates, Tasco has considered locking in ocean freight rates for 1HCY23, which acts as a confidence boost amid global uncertainties. Despite the 3QFY23 net profit blip on an unrealised foreign exchange (FX) loss, our analysis indicates that 4QFY23 earnings should see better numbers amid a stabilising FX rate. The much-anticipated four-storey Shah Alam Logistics Centre is still progressing, with a handover slated for January 2024.

Management believes the global recession should be the most pressing problem for the group and the logistics industry as a whole. Nevertheless, our house remains bullish in terms of US and global growth, which will show signs of recovery by the summer of 2023. For 2023, our GDP growth forecast in the US is 2% while the International Monetary Fund projects a global growth of 2.9%. Even so, management shared its strategy to reduce third-party outsourcing for the contract logistics segment while maintaining high utilisation of its own assets should a global recession happen.

Moving forward, diversified services and clientele will remain the key play for Tasco, along with its strong international presence. We continue to look forward to the group delivering commendable sustainable performances, defying investor expectations of an earnings contraction.

Target price: RM14.50 OUTPERFORM

KENANGA RESEARCH (FEB 8): FY22 net profit of RM276.6 million (-20%) and total dividends of 60 sen are above our expectations as earnings were supported by better policy retention and investment gains. LPI is likely to see greater competitive forces in its chief fire insurance and motor segments as further detariffication kicks in. However, there could be support as peakish claims ease. Better MFRS 17 reporting could garner favour against its peers.

We maintain our “outperform” call with a higher TP of RM14.50 (from RM14.10) as we roll over our valuation base year to FY24 against an unchanged P/BV of 2.5 times, based on a 25% premium to its historical forward P/BV of industry peers. At current price levels, we believe there are buying opportunities as LPI’s premium remains justified based on its better dividend prospects and earnings, notwithstanding the support from its affiliation with Public Bank. While there is no guided impact with regard to MFRS 17 on group earnings, investors may be more inclined towards LPI as opposed to its peers that are expecting earnings erosion.

Target price: RM1.01 BUY

MAYBANK INVESTMENT BANK (FEB 8): We had a conversation with management following news that implied MyEG would no longer be involved in the nation’s immigration system by 2025. The related concession business comprises about 10% of its FY23E revenue and its ancillary business could also be impacted.

We make no change to our earnings forecasts, though our TP is cut to RM1.01 (-26%) as we change our valuation methodology to SOP (PER previously). We maintain our “buy” call as its new businesses could grow to fill the void by then.

The immigration segment contributes 35% to 40% of MyEG’s overall annual revenue, although only about 10% (RM70 million to RM80 million) is related to the government concession, that is, the renewal of foreign worker permits. The other 25% to 30% (RM200 million) is the commercial aspect of the business, namely (1) commissions from cross-selling insurance products; and (2) foreign worker recruitment for employers. Its revenue could fall only by 2H2025, following the completion and migration of the immigration system to the National Integrated Immigration System. We estimate the revenue shortfall to be 6% to 7% by FY25E and 8% to 10% by FY26E.

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