Kossan reported a weaker set of results for 1QFY22, with a 91.4% YoY decrease in net profit to RM90.1m. The results were below our expectation but in line with street’s estimates at 16.3% and 26.7% of full year forecast respectively. All segments posted lower YoY revenue in 1QFY22 (Glove: - 70.9%; Clean-room: -49.5%), except for technical rubber products segment (TRP) which recorded an 18.7% increase in revenue. We cut our FY22-24F earnings by 4-30%, factoring in lower revenue and higher cost due to delays in its expansion plan, impact of container shortage and inflationary pressure. We maintain our Neutral call with a lower TP of RM1.72, pegged to a PE multiple of 17x (at its 5-year historical mean), on CY23F EPS of 10.1sen per share.

• 1QFY22 revenue dropped by 25.3% QoQ. Kossan’s 1QFY22 revenue was down 25.3% QoQ to RM690.6m due to weaker contribution from glove and cleanroom division but partly mitigated by higher revenue from TRP division. Glove division delivered a 27.2% QoQ drop in revenue to RM609.3m, due to a sharp decline in ASP and lower sales volume on the back of logistical challenges caused by the global shipping container shortage.

• 1QFY22 PATAMI was down 58.8% QoQ to RM90.1m. Glove division’s profit before tax dropped by 60.8% QoQ to RM111.0m with PBT margin falling from 33.9% to 18.2% as the rate of decline in raw material prices was slower than the declined in ASP. ASP was down 22-27% and the impact was exacerbated by a 5-10% drop in sales volume. Meanwhile, raw material costs, nitrile butadiene, decreased by 30-35% QoQ but latex prices increased by 18-20% QoQ.

• Earnings adjustment. We cut our FY22-24F earnings by 3.5-30.1% after factoring in lower revenue and higher cost. Given the oversupply condition, Kossan has delayed its expansion plan to FY23 which was originally targeted to complete in FY22. On top of that, we assume a lower utilisation rate as logistical challenges are not expected to be resolved anytime soon. We are expecting higher cost due to inflationary pressure and we opine that the glove makers are not able to fully pass on the cost increase to the buyers due to the current competitive operating environment. Beyond the near-term headwinds, we are optimistic with the long term prospect of the industry, supported by higher hygiene awareness that should lead to increase in per capita consumption especially from the emerging markets.

Source: PublicInvest Research - 28 Apr 2022