Kossan Rubber’s (Kossan) 1QFY23 net loss widened to RM24.3m against a net loss RM2.49m in 4QFY22, mainly due to weaker average selling prices (ASP) and lower sales volume. The results were below expectations, given our and consensus net profit forecasts for the full-year. While the technical rubber (TRP) segment contributed a revenue growth of 13.9% YoY, the gloves and clean-room divisions revenue posted declines of 47.9% and 26.1% YoY respectively. We cut our FY23-25F earnings forecast by 20-31% to reflect lower sales volume and utilisation rate. We maintain our Underperform call and our TP is subsequently revised to of RM0.81 is based on 16x PER on 2-year average forward earnings.

• 1QFY23 results highlight. Kossan’s 1QFY23 revenue was down 18% QoQ to RM394.7m due to weaker contribution from the glove and clean-room divisions. Gloves saw a 21.1% QoQ drop in revenue to RM317.5m, due to the decline in ASP and sales volume, while clean-room division revenue dropped 38.8% QoQ to RM21m. However, TRP division posted an increase of 26.4% QoQ to RM56.2m in tandem with higher deliveries for TRPs products. Meanwhile, Kossan reported a loss before tax (LBT) of RM19.1m in 1QFY23 from a PBT of RM0.96m in 4QFY22, mainly due to a decline in ASP (23-28%) and sales volume (28-33%). This was partially mitigated by lower prices of its raw materials i.e nitrile butadiene (25-30%) and latex (15- 20%).

• Second consecutive net loss in 1QFY23. Kossan reported a second consecutive net loss of RM24.3m in 1QFY23, compared to a net loss of RM2.5m in 4QFY22, due to a decline in gloves and clean-room divisions. Gloves division recorded a LBT of RM34.9m in 1QFY23 from RM22.7m LBT in 4QFY22, mainly due to higher energy costs following an increase in natural gas and electricity tariffs, intense market competition and lower plant utilization. Cleanroom division’s PBT dropped by 54% QoQ to RM1.59m in 1QFY23, due to a lower margin of 7.6%. Meanwhile, TRP’s PBT increased by 3.8% to RM7.9m in 1QFY23 on better performance in the infrastructure segment.

• Outlook. Overall market demand remains weak with consumption falling below pre-pandemic level, mainly due to stockpiling and inflationary pressure. We believe major customers would not have the urgency to place huge orders in the near term. Operating environment will continue to be challenging given a muted demand while cost pass-through is limited by thecurrent competitive landscape. We understand that other players are starting to raise their selling prices but we generally believe that this would not be sufficient to turn the business profitable. As such, we expect Kossan to remain loss-making in the coming quarter.

Source: PublicInvest Research - 28 Apr 2023