Overview. Kossan’s 3QFY21 revenue increased to RM1.3bn (+26.1% yoy), while net profit jumped to RM528.2m (+51.5% yoy) mainly contributed by higher ASP (c.90-110% yoy), mitigating the decline in sales volume by 30-35% yoy. On qoq basis, net profit fell by 50.4% mainly due lower ASP (c.15-20% qoq) and lower sales volume (c.25- 30%) as production was affected by EMCO and National Recovery Plan which limited workforce capacity to 60%.

Against estimates: Inline. 9MFY21 net profit of RM2.6bn, making up 88% and 84% of our and consensus full year forecast. We deem our forecast within expectations, as we are expecting lower 4QFY21 earnings performance.

Dividend. Third interim DPS of 12 sen was declared, bringing YTD DPS declared of 36 sen (c.35% payout of 9MFY21 EPS). We estimate total FYE21 DPS of 41.3 sen, translating into DY of 16.9%.

Outlook. Despite long term global glove demand remaining positive on structural demand change, Malaysia’s glove makers is facing multiple headwinds such as near term sharp fall in market ASP, higher competition and social compliance cost. The ASP is expected to continue to fall in the upcoming months (c.8-10% mom) before normalizing in 1H2022, in our view. This is mainly due to the increasing global supply and softer demand on higher vaccine rolled out. Additionally, given price erosion that is faster-than-expected, we believe that expansion plan may be scaled back to prevent the risk of oversupply and sub-optimal utilisation rates.

Earnings revision. We revised down our FY22F/FY23F earnings by 48%/30% to factor in i) lower FY22/23F blended ASP assumptions to USD29/26 (from USD35/30) per 1k pcs, ii) lower capacity utilisation rate of 80% (from 85%) and iii) higher operation cost.

Our call. In tandem with earnings revision, we have derived a lower TP of RM2.40 (from RM3.40) based on unchanged PER 15x pegged on CY23F EPS of 15.9 sen. Maintain HOLD.

Source: BIMB Securities Research - 22 Oct 2021