Investment Highlights

• We maintain our HOLD recommendation on Kossan Rubber Industries (Kossan) with a lower fair value of RM1.60 (vs. RM2.55 previously). This is based on PER of 17x FY23F EPS. There is no ESG-related adjustment based on our 3-star rating.

• Kossan’s FY21 net profit of RM2.85bil was below expectations as it made up 94%/88% of consensus/our FY21 earnings estimates. The negative deviation is due to faster-than-expected decline in average selling price (ASP) and weak sales volume.

• A dividend of 12.0 sen was announced. The ex-date will be 5 April while the payment date is 22 April.

• 4QFY21 earnings tumbled 59% QoQ to RM219mil. The significant drop in earnings was due to the lower ASP which fell by 35%–40%.

• ASP is still in a downtrend. The company attributed this to the decline in serious Covid-19 cases worldwide. It stated that even with the Omicron variant, the percentage of Covid-19 cases categorised as severe had declined noticeably compared to the earlier stages of the pandemic.

• Meanwhile, FY22/FY23 earnings were reduced by 54%/38% to RM222mil/RM240mil. This is after taking into account new blended gloves ASP assumption of US$24.2/US$24.2 (previously US$26.6/US$25.5) for FY22/FY23. We have also introduced FY24 earnings estimate of RM296mil.

• We cut our fair value to RM1.60 from RM2.55 per share in line with the earnings reduction. Our target PE of 17x remains, which is Kossan’s pre-pandemic average PE.

• Kossan is still a HOLD. The upside is limited as the ASP is still trending lower. While, we expect this downtrend to continue in 1Q2022, ASP should stabilize at around US$25 for nitrile gloves. Kossan has a strong balance sheet with net cash of RM2.38bil or RM0.93 per share.

• Risks to our HOLD call are lower-than-expected ASP, weaker-than-estimated sales volume and a spike in raw material costs.

Source: AmInvest Research - 18 Feb 2022