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Analysts cut Hartalega's earnings forecast after management warns about possible RM400m prosperity tax in FY22

KUALA LUMPUR (Nov 3): Despite Hartalega Holdings Bhd reporting decent results in the second quarter ended Sept 30, 2021 (2QFY22), most analysts on Wednesday reduced their earnings forecasts on the company as they see the firm to be one of the few companies that will be hit the hardest by the proposed “Cukai Makmur” (prosperity tax), which is applicable for the year of assessment 2022.

Hartalega rose as much as 22 sen or 3.83% to RM5.97 on Wednesday morning, after the group reported on Tuesday that its net profit jumped 67.72% to RM914 million in 2QFY22 from RM544.96 million a year ago.

However, the counter later pared gains on profit-taking at RM5.79, up only by four sen or 0.7%.

According to analysts, Hartalega’s earnings for the financial year ending March 31, 2022 (FY22) will be hit hard by the additional one-off special windfall tax as the management estimated the additional tax bill at about RM400 million.

Citing management, they said the tax will materially impact the bottom line of Hartalega in the second half of FY22 (2HFY22), as the group’s year of tax assessment for 2022 falls during the period of April 1, 2021 to March 31, 2022, which is the most profitable period for most of the glove players.

MIDF Research said in a note that despite the group’s 1HFY22 net profit of RM3.18 billion exceeding its expectations, the research house estimated “Cukai Makmur” will cost Hartalega an additional RM639.2 million in its earnings estimates for FY22.

It lowered Hartalega's earnings estimates for FY22 and FY23 by 10.1% and 4.4% respectively to RM3.59 billion and RM1.14 billion.

It maintained its "buy" call on the company, but revised down its target price to RM8.03 from RM8.40 previously.

While deeming Hartalega’s performance is in line with its projections, PublicInvest Research lowered Hartalega's earnings forecasts for FY22 to FY24 by 1% to 24% to reflect the impact of “Cukai Makmur”, lower utilisation rate and softening average selling prices (ASPs).

Following the adjustment, the research house cut its call on Hartalega to "neutral" from "outperform", and its target price to RM6.13 from RM7.80.

Meanwhile, although Hartalega's performance in 2QFY22 surpassed Affin Hwang Investment Bank's expectation, the research house sees a weaker 2HFY22 for Hartalega as ASPs have contracted sharply in 3QFY22 quarter-to-date while the current labour shortage is only expected to ease in 4QFY22.

“We have cut our FY22 to FY24 earnings per share by 10% to 46% to provide for a higher tax rate and also the latest ASP trend,” it said.

While maintaining its "hold" call on Hartalega, Affin Hwang lowered its target price to RM5.80, from RM7.40.

KAF Research, which maintained its "sell" call and target price of RM4.79 for Hartalega, said the glove maker may be the worst impacted by the “prosperity tax” as compared to its closest peers, which saw earnings peak in FY21.

“The group’s 2Q earnings exceed our expectation despite production disruption caused by plant shutdown due to the implementation of movement control order, and 60% workforce restriction.

“Despite operations having fully resumed, we still expect weaker earnings in the coming quarters, even more so with the imposition of ‘prosperity tax’,” it said.

However, it revised its earnings forecasts for FY22 upward by 16% as it assumed higher overall utilisation as it expects utilisation rates to significantly improve in 4QFY22.

Maybank Investment Bank Research, which reiterated its "sell" call and target price of RM4 for Hartalega, also opined that Hartalega's 2HFY22 earnings performance will be weaker, no thanks to declining ASP and the additional tax charges arising from the prosperity tax.

However, it raised Hartalega FY22 earnings forecasts by 11% to factor in a higher exchange rate of RM4.15 per US dollar (from RM4.10 per US dollar) and utilisation rate of 75% (from 72%) in FY22.

“Nevertheless, we have not factored in the ‘prosperity tax’ which would then lower our new FY22 net profit by 2%,” it said.


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