• Overview. Kossan’s 4QFY21 net profit dropped to RM218.7m (-58.6% qoq, -59.7% yoy). The performance was impacted by i) decline in ASP (-c.35-40% qoq, -c.17-22% yoy) and ii) lower yoy volume (-c.14-19% yoy) mainly caused by container shipping disruptions.

• Key highlights. Kossan’s ASP declined by 35-40% qoq to circa US$40- 45/ 1k pcs in 4Q21 and is expected to drop further in tandem with market ASP to around US$25-27 by end 1Q22, in our view. As for capacity expansion, the company has not indicated any expansion delay, but we do not discount the possibility of slowdown in new production lines due to unfavourable supply-led dynamics in the market.

• Against estimates: Inline. FY21 net profit of RM2.9bn was inline with our full forecast but below consensus at 96% and 93.7% respectively.

• Dividend. 4 th interim DPS of 12 sen was declared, bringing total FY21 DPS of 48 sen (c.43% payout) and dividend yield of 28.4%.

• Outlook. Tough operating conditions are likely to persist in 2022. We expect Kossan’s 1HFY22 earnings to be impacted by lower ASP as well as volume due to supply chain disruptions caused by shipments issues and labour shortage. Profit margin could further erode due to overall higher operating cost as well as one-off prosperity tax. Despite near term headwinds, Kossan’s long term prospect remain positive on normalize ASP and structural glove demand growth.

• Earnings revision. We revised down our FY22F/FY23F earnings by 45%/23% to factor in i) lower FY22/23F blended ASP assumptions to USD25/24 (from USD29/26) per 1k pcs, ii) lower sales volume iii) lower margin and iv) one-off prosperity tax.

• Our call. In tandem with earnings revision, we have derived a lower TP of RM1.80 (from RM2.40) based on unchanged PER 15x pegged on CY23F EPS of 12 sen. Maintain HOLD.

Source: BIMB Securities Research - 18 Feb 2022