Hartalega faces margin pressure as selling price increases prove difficult to sustain

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Highlights

Hong Leong Investment Bank downgraded Hartalega to 'sell' and cut its target price to 80 sen, citing industry oversupply and cost pressures.
Hartalega's average selling price fell 15% to U.S.$22 per 1,000 units in the third quarter, while raw material and natural gas costs continued to weigh on margins.
CIMB IB maintained its 'hold' call and RM1.12 target price, expecting weaker quarterly performance amid industry oversupply and price pressure from Chinese producers.

This article was translated from the original. Read the original version by our correspondent here.

Outlook revisions and risks for the coming quarter

As reported by The Edge Malaysia, Hong Leong Investment Bank Bhd said in a research note on Friday that Hartalega's outlook is clouded by persistent industry oversupply and cost pressures, including higher natural gas tariffs and the minimum wage increase announced in Budget 2027.

These factors prompted the research house to downgrade Hartalega to "sell" from "hold" and cut its target price to 80 sen from 97 sen. This makes it the most bearish view among analysts covering the stock, despite Hartalega more than tripling its net profit to RM102.83 million in the first half of the financial year ending 31 March 2027.

According to HLIB, the removal of temporary support previously provided by an NBR shortage (nitrile butadiene rubber) and cash deposit requirements imposed by NBR suppliers has changed the market landscape. These conditions had previously forced small and medium-sized producers to cut production, helping to ease industry oversupply.

Without these dynamics, current average selling price increases are seen as having the potential to support earnings only through the inventory lag effect. HLIB also noted that Brent crude prices have fallen by about 19% since 30 Oct, raising the risk of average selling price revisions downward from December, while higher natural gas costs are expected to continue weighing on margins.

Sector outlook remains weak

In a separate note, CIMB Investment Bank Bhd maintained its "hold" call on Hartalega with an unchanged target price of RM1.12, although it expects weaker near-term earnings. The firm expects third-quarter performance to decline from the previous quarter as selling prices adjust to more normal levels and higher raw material costs are passed through with a slight delay.

CIMB IB said Hartalega's average selling price had fallen to around U.S.$22 per 1,000 units, from U.S.$26.70 in the second quarter, a decline of about 15%. According to Bloomberg data, 17 analysts now cover Hartalega, with three "buy" ratings, 12 "hold" ratings and two "sell" ratings, while the average 12-month target price is RM1.14.

CIMB IB also warned that prolonged industry oversupply and price pressure from Chinese producers continue to constrain the sector's recovery. This means selling prices remain under pressure even as Hartalega seeks to improve operational efficiency.

This adds to earlier discussion surrounding AI stocks plunge as oil prices hit $110 a barrel and stoked inflation concerns.

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