Kossan Rubber’s (Kossan) 3QFY22 net profit decreased by 49.4% QoQ to RM23.3m. For 9MFY22, net profit declined by 94.0% YoY mainly due to weaker average selling prices (ASP) and lower sales volume. The results were within both our and consensus estimates at 74.7% and 78.6% of full year forecasts respectively. While the technical rubber (TRP) segment posted growth of 18.8% YoY, both the glove and clean-room divisions posted declines of 68.0% and 44.5% YoY in 3QFY22. Our earnings estimates are left unchanged, with Neutral call and TP of RM1.23 retained, pegged to a 16x earnings multiple (5-year historical mean) on CY23F EPS of 7.7sen per share.

• 3QFY22 revenue dropped 4.5% QoQ. Kossan’s 3QFY22 revenue was down 4.5% QoQ to RM560.5m due to weaker contribution from the glove and clean-room divisions. Gloves saw a 10.3% QoQ drop in revenue to RM464.2m, due to the decline in ASP and volume sold. Revenue was also affected by higher natural gas tariffs and minimum wages. Nevertheless, some of this weakness was mitigated by higher revenue in the TRP division with an increase of 67.7% QoQ to RM64.7m due to stronger infrastructure related business.

• PBT in gloves segment dropped 98.1% QoQ. The Glove division’s PBT dropped by 98.1% QoQ to RM1.01m with margins falling from 10.3% to 0.2% mainly due to the QoQ increase in raw material prices. ASP was down between 2% and 6%, with the impact exacerbated by a 14%-18% drop in sales volume. Cost of raw materials was mixed. Nitrile butadiene increased by 8%-12% QoQ though latex prices decreased by 12%-16% QoQ. With product mix of 70:30 nitrile to natural rubber gloves, Kossan will be more adversely affected by the hike in raw material prices, notably nitrile butadiene.

• Outlook. We note that current share prices of glove makers are advancing against the backdrop of resurging Covid-19 cases in Malaysia and some other parts of the world following the discovery of the XBB sub-variant. However, we expect ASPs to remain depressed until 1HFY23 given the imbalance in supply-demand conditions, and occurences of overstocking. Kossan has also deferred near-term capacity expansion plans to curtail excess supply. We expect margin erosion will continue as glove makers are not able to fully pass on the rising cost to buyers given the current competitive operating environment. Beyond the near-term headwinds, we are optimistic over the long term prospect of the industry. MARGMA (Malaysian Rubber Glove Association) has a 12%-15% glove demand growth projection for FY23, supported by higher hygiene awareness that should lead to increase in per capita consumption, especially from emerging markets.

Source: PublicInvest Research - 3 Nov 2022