Kossan Rubber’s (Kossan) 2QFY23 net loss narrowed to RM3.3m against a net loss of RM24.3m in 1QFY23. For 1HFY23, the group recorded a net loss of RM27.6m (-120.2% YoY) from a net profit of RM136.1m, mainly due to weaker average selling prices (ASP) and lower sales volume. The results were below expectations, as we are forecasting a net profit for full-year FY23F. However, we are keeping our earnings forecasts unchanged as we expect a sequential improvement due to lower raw material cost and higher contribution from the clean-room division. Given our view that Kossan is not likely to revert to pre-Covid profit level in FY23-24F, we reiterate our Underperform call and TP of RM1.08 based on 0.7x (1-year historical PB multiple mean) on its CY23 BVPS.

• 2QFY23 revenue was marginally lower. Kossan’s 2QFY23 revenue was down 1.8% QoQ to RM387.5m due to weaker contribution from the glove and TRP divisions. Gloves saw a 0.5% QoQ drop in revenue to RM315.9, due to a 3-5% drop in sales volume while ASP remained relatively unchanged at ~USD18-20/1k pieces. TRP revenue declined by 14.8% QoQ to RM47.8m due to lower deliveries for TRPs products. Clean-room division revenue posted an increase of 13.5% QoQ to RM23.9m on the back of stronger demand.

• Net loss narrowed in 2QFY23. Kossan reported a third consecutive net loss of RM3.3m in 2QFY23, compared to a net loss of RM24.3m in 1QFY23, due to lower operating costs. Gloves division recorded a LBT of RM12.1m in 2QFY23, from RM34.9m LBT in 1QFY23, mainly due to lower energy costs. Clean-room division’s PBT increased by 49% QoQ to RM2.4m in 2QFY23, in tandem with higher revenue from increasing demand in clean-room products. Meanwhile, TRP’s PBT increased 8% QoQ to RM8.6m in 2QFY23 on higher margin despite lower deliveries.

• Outlook. We believe the operating environment will remain challenging due to muted global demand for gloves. The competitive landscape limits the ability for Malaysian gloves players to raise ASP and pass on costs increases to customers. We believe sales volume is not likely to pick up strongly as major customers are not urgently placing huge orders given the low utilization rates across the sector.

Source: PublicInvest Research - 28 Jul 2023