Investment Highlights

• We maintain our HOLD call on Kossan Rubber Industries (Kossan) with an unchanged fair value (FV) of RM1.00/share. This is pegged to a target FY23F PE of 14x, at parity to its 10- year average. No ESG-related FV adjustments based on an unchanged 3-star rating.

• Kossan’s FY22 core net profit of RM144mil was largely within our expectation, coming in 3.5% above our forecast. However, the results missed consensus at 14% below street’s estimates. The slight deviation from our estimation was mainly due lower operating expenses.

• Hence, we maintain FY23-24F net profits while introducing FY25F earnings with a growth of 9.5%, premised with an average glove selling price (ASP) of US$24/k.

• The only FY22 dividend of 2.5 sen/share has been declared for 4QFY22 (implying a payout of 41%), which beat our forecast of 2 sen/share.

• Kossan reversed to a 4QFY22 core loss of RM4.9mil from a core profit of RM17.6mil in 3QFY22. This was primarily attributable to a 14.1% QoQ drop in revenue. The weaker revenue mostly stemmed from the glove division with a significant QoQ decline of 12.5% in ASP and 1%-3% in sales volume. The loss was exacerbated by rising operating expenses mainly from natural gas (+14%-25%).

• In terms of plant utilisation rate (PU), Kossan was running at 40%-50% in 4QFY22, which was comparable to 3QFY22, albeit lower than 75% in 2QFY22 and its normalised level of 85%. We believe this was the result of the intense market competition, customer destocking and excess global capacity.

• Nevertheless, demand for medical rubber gloves in Jan-Feb 2023 remains sluggish and volatile. As the replenishment cycle could happen in 3QFY23 or later, as opposed to the previously anticipated 2QCY23, we believe PU may remain subdued over the coming quarters.

• Kossan’s 4QFY22 blended ASP fell 12.5% to US$22.1/1K pcs (vs US$25.3/1K pcs in 3QFY22). Based on our channel checks, Malaysian glove makers have been selling normal nitrile medical gloves at an ASP of U$17-19/1K pcs since Dec 2022.

• In comparison, Chinese glove makers have been selling at US$14-15/1K pcs since Sep 2022 (or US$15-16/1K pcs inclusive of the 7.5% US-tariff). On a positive note, the results of glove makers under our coverage have all fallen into the red, as have Chinese players. Therefore, we believe ASP could have already bottomed out.

• Notwithstanding likely prolonged losses, we believe Kossan has adequate financial resources, armed with net cash of RM2bil (translated to RM0.78/share) or 69% of current market cap.

• The stock currently trades at a fully valued FY23F PE of 16x, which is 14% above its 10-year average of 14x. We believe this is unjustified given the unabated challenges of an oversupplied sector globally, which could translate to persistent losses over the coming quarters.

Source: AmInvest Research - 17 Feb 2023