Kossan’s FY21 net profit grew by 162.3% YoY to RM2.85bn, on the back of stronger ASP but offset by lower sales volume. The results came in slightly below both our and consensus estimates at 94% and 93% respectively. We expect weaker performance in the coming quarters, mainly due to supply chain disruption while high vaccination rate in both developing and developed countries have resulted in slower demand for gloves. As such, we cut our earnings projection by 21-34% for FY22-23F to account for lower ASP and to reflect the impact on “Cukai Makmur”. We maintain our Neutral call on Kossan, with a lower target price of RM1.73, pegged to a PE multiple of 17x (at its 5-year historical mean), on CY23F EPS of 10.1sen per share. On a side note, Kossan declared a fourth interim dividend of 12sen per share, making up total dividend declared in this financial year to 48sen, translating to a 42.9% payout.

• 4QFY21 results highlight. Kossan’s 4QFY21 group revenue was down 29.0% QoQ to RM924.6m due to weaker revenue contribution from glove and cleanroom division but partly mitigated by higher revenue from technical rubber division (TRP). PBT was 60.7% lower QoQ to RM273.7m. The weaker performance was mainly due to decline in ASP (35-40%) but this was partly offset by increased in sales volume (13-18%). Meanwhile, raw material costs, nitrile butadiene prices decreased by 25-30% QoQ but latex prices increased by 6-8% QoQ.

• Glove division delivered a 31.3% QoQ drop in revenue, reporting revenue of RM836.4m, due to a sharp decline in ASP and shortage in global shipping container. In tandem with lower revenue, glove division’s profit before tax has fallen by 58.4% QoQ to RM286.8m. PBT margin dropped from 56.6% to 34.3% as the rate of decline in raw material prices was slower than the declined in ASP.

• Omicron. Even with the recent spike in Covid cases globally due to the high transmissibility of Omicron variant, we do not expect demand for glove to increase significantly due to the mild symptoms of Omicron and therefore the panic buying phenomena is unlikely to recur again.

• Outlook. Given a moderating demand for gloves and oversupply due to aggressive expansion, ASP for glove is expected to continue its downward trend in the coming quarters. Supply chain disruption is not likely to resolve in the near term. However, in the long run, demand for gloves should continue to grow due to improvement in healthcare standard and hygiene awareness.

Source: PublicInvest Research - 18 Feb 2022