Kossan Rubber (Kossan) reported a net profit of RM41m in 3QFY23 from a net loss of RM3.3m in 2QFY23, mainly due to a 5-15% QoQ increase in sales volume. For 9MFY23, the group recorded a net profit of RM13.4m (-91.6% YoY) from a net profit of RM159.4m, mainly due to a 19-24% YoY drop in average selling prices (ASP). The results were below our expectation at 27.2% but above streets’ estimates of a net loss for the full-year. The discrepancy in our forecast was mainly due to a lower-than-expected ASPs. We maintain our FY23 forecast but raise FY24-25F net profit by 15-17% as we expect Kossan to record higher sales volume on stablised ASPs, underpinned by customer re-stocking. We believe Kossan’s TRPs division to improve as well with higher demand in tandem with growing infrastructure spending. All told, we upgrade our call on Kossan from Underperform to Neutral, with a higher TP of RM1.38, as we roll over our our valuation to CY24F BVPS, based on 0.9x (from 0.7x previously) which is near its 1-year historical mean.

• Revenue improved QoQ due to higher sales volume. Kossan’s 3QFY23 revenue was up 4.1% QoQ to RM403.5m due to higher contribution from gloves, clean-room and TRPs divisions. Gloves division recorded a revenue of RM321.2m (+1.7% QoQ), mainly attributed to a 5-15% increase in sales volume. However, ASP dropped 3-5% QoQ. TRPs division’s revenue increased by 17.8% QoQ to RM56.3m due to higher deliveries for TRPs products. Clean-room division revenue posted an increase of 8.6% QoQ to RM25.9m on the back of stronger demand.

• Turning profitable in 3QFY23. Kossan reported a net profit of RM41m in 3QFY23, after posting 3 consecutive quarters of losses, mainly due to lower operating costs. Gloves division recorded a PBT of RM31.2m in 3QFY23, from RM12.1m LBT in 2QFY23, due to lower energy costs and raw material prices (nitrile butadiene dropped by 26-31% QoQ; natural rubber dropped by 18-23% QoQ). TRPs PBT increased by 27.9% QoQ to RM11m in 3QFY23 on improved margin with higher deliveries. Meanwhile, clean-room division’s PBT improved by 18.4% to RM2.82m in 2QFY23, in tandem with higher revenue from increasing demand for clean-room products.

• Outlook. We expect Kossan to record higher sales volume in the upcoming quarters, given customes’ low inventory levels. However, ASPs are not expected to rise meaningfully as customers are still not willing to absorb any incremental cost given the prevailing pricing competition from Chinese gloves players. Nevertheless, we believe the lower raw material prices and the strengthening of USD would be favourable to Kossan. Notably, the increasing demand for TRPs products are expected to drive TRPs division’s revenue higher with improved infrastructure spending. All told, we upgrade our call on Kossan to Neutral.

Source: PublicInvest Research - 16 Nov 2023