• Overview. Kossan ‘s 1QFY22 net profit tumbled to RM90.1m (-58.8% qoq, 91.4% yoy) on the back of sluggish revenue of RM690.6m (- 25,3% qoq, -68.5% yoy). The subdued results were dented by i) decline in ASP (-c.22-27% qoq, -c.35-47% yoy) and ii) lower yoy volume (-c.5-10% qoq, -c.22-27% yoy) resulted from container shipping disruptions.

• Key highlights. Kossan’s ASP during 1QFY22 was c.US$30/1k pcs. We expect the ASP to drop further in line with market pricing. Besides, capacity expansion is expected to move at a slow pace to muddle along with the unbalanced supply-demand environment in the glove industry.

• Against estimates: Inline. We deem 1QFY22 net profit of RM90.1m was inline with our full year forecast (30.8% vs market: 26.7%). We expect earnings to continue to deteriorate going forward due to a further decline in ASP.

• Outlook. Tough operating conditions are likely to prolong in 2022 as glove demand and ASP are in the transition phase towards prepandemic levels coupled with massive supply from new entrants. Overall, we expect Kossan’s earnings to continue to be impacted by lower ASP as well as volume due to supply chain disruptions caused by shipment issues. Moreover, profit margin could be further eroded by higher operating costs as well as a one-off prosperity tax.

• Earnings revision. No changes in our earnings forecast.

• Our call. Maintain HOLD call with an unchanged target price of RM1.80. Our valuation is based on PER 15x pegged on CY23F EPS of 12 sen.

Source: BIMB Securities Research - 28 Apr 2022