Investment Highlights

• We downgrade Kossan Rubber Industries (Kossan) to HOLD from BUY previously after the share price appreciated 23% in the past 3 months, rising above our unchanged fair value (FV) of RM2.26/share based on a target FY25F PE of 22x, which is 0.25x SD above its 10-year average of 17x. No ESG-related FV adjustments based on an unchanged 3-star rating.

• Kossan’s 1QFY24 core net profit (CNP) of RM39mil was within our expectations and consensus. Also, no interim dividend was declared as expected.

• Kossan registered a 1QFY24 core net profit turnaround from a core net loss of RM27mil in 1QFY23. This was driven by a 14% topline growth resulting from higher contribution from glove (+20% YoY) and clean room (+10% YoY) divisions.

• QoQ, Kossan 1QFY24 core net profit rose by 35%, attributed to revenue increases in glove (+15% QoQ) and technical rubber (+10% QoQ). These offset a 12% decline in revenue from the clean room division.

• We estimate that Kossan’s blended average selling prices (ASP) increased by 5% to US$19-21/1K pcs in 1QFY24 from US$18-20/1K in 4QFY23. This is in line with Hartalega and Top Glove Corporation. We believe that Kossan passed on the higher operating costs, such as raw materials and gas, in the form of increased selling prices in 1QFY24.

• For FY24F, we are cautiously optimistic on Kossan’s prospects due to:
  
  i) easing competition from industry consolidation and capacity adjustment,
  
  ii) increased hygiene awareness and stricter quality standards, and
  
  iii) growing demand for technical rubber products, driven by rising global economic activity and increased infrastructural investment.

• Kossan has a strong balance sheet as reflected in the net cash of RM2bil (RM0.81/share) as at end-March 2024. Due to the group’s strong cash reserves, we believe that Kossan would not face financing issues in carrying out acquisitions or paying more dividends.

• Kossan is currently trading at a fully-valued FY25F PE of 24x, vs. its pre-pandemic FY18-FY19 average of 20x.

Source: AmInvest Research - 23 May 2024