Kossan’s 9MFY21 net profit grew by 383.8% YoY to RM2.63bn, on the back of stronger ASPs and sales volume on a YoY basis. The results came in above both our and consensus estimates at 86% and 84% respectively. However, we still deem the results in line, as we reckon that ASPs have started to display a downward trend in 3Q2021, as high vaccination rate in both developing and developed countries have resulted in slower demand for gloves. As such, we cut our earnings projection by 25-31% for FY22-23F to account for further reduction in ASP and lower sales volume. We maintain our Neutral call on Kossan, with a lower target price of RM2.65, pegged to a PE multiple of 21x (at its 5-year pre Covid historical mean), on CY23F EPS of 12.9sen per share. On a side note, Kossan declared a third interim dividend amount to 12sen per share, making up total dividend declared in this financial year to 36sen, translating to a 34.9% payout.

• 3QFY21 results highlight. Kossan’s 3QFY21 group revenue was down by 41.8% QoQ to RM1.30bn due to weaker revenue contribution across all three divisions. PBT was 50.4% lower QoQ to RM696.8m. The poor performance across all three divisions was mainly affected by the Enhanced Movement Control Order (EMCO) implemented in Selangor as well as the National Recovery Plan (NRP) where its manufacturing plants were only allowed to operate with 60% workforce.

• Glove division. The main culprit for the poor performance in 3QFY21 was due to the poor performance in its glove division. Kossan’s glove division delivered a 42.7% QoQ drop in revenue, reporting revenue of RM1.2bn, due to a 15-20% decline in ASP. In addition, sales volume also dropped by 25- 30% QoQ. However on a bright side, raw material costs, nitrile butadiene prices decreased by 8-12% QoQ, while latex prices decreased by 16-18% QoQ. These have partially offset the impact of lower ASP and sales volume. In tandem with the drop in revenue, the glove division’s profit before tax has fallen by 50.2% on a QoQ basis to RM689.0m, accounting for c.99% of Kossan Group’s profit before tax.

• Technical Rubber Product (TRP) Division. Due to the effect of EMCO and NRP, Kossan’s TRP division recorded a 21.4% and 62.1% drop in revenue and profit before tax respectively. However, we believe that this division should continue to benefit from an uptick in economic activity as well as infrastructure spending regionally.

• Expansion. Line commissioning in Plant 20 (5 lines, +1.5bn pcs pa) is underway currently, with completion targeted in 4QFY21. The expansion on its Meru land will be carried out in two phases, with the 1st Phase (6 lines, +2.0bn pcs pa) targeted to begin commissioning in 2HCY21F, while the 2nd phase (10 lines, +3bn pcs pa) will start in 1HCY22F. Should demand for gloves decline post-pandemic with stronger competition from overseas players, we do not rule out the possibility of Kossan pushing back some of its expansion plans, to rebalance any potential demand-supply disequilibrium in the market.
• Outlook. Given the high vaccination rate recorded across the globe and oversupply due to the aggressive expansion being done by glove players, the ASP for glove is expected to continue its downward trend in the coming years. However, in the long run, demand for gloves should continue to grow due to improvement in healthcare standard and hygiene awareness.

Source: PublicInvest Research - 22 Oct 2021