• Overview. Kossan‘s 2QFY22 net profit of RM46m slid by 48.9% q-o-q and 95.7% y-o-y respectively on the back of disappointing revenue of RM589.9m which decreased by 14.6% q-o-q and 73.6% y-o-y. This was pulled down by i) lower average selling price ASP), ii) disappointing sales volume and iii) higher energy and labour costs. Meanwhile, for 1HFY22, revenue and net profit declined by 71.1% y-o-y and 93.5% y-o-y respectively.

• Key highlights. Management highlighted that 2QFY22 performance was affected by massive decline in ASP (-c.10%-15% q-o-q; -c.65%- 70% y-o-y) which was dampened by global supply glut condition. Moreover, capacity expansion for Kossan has been put on hold considering the current challenging operating environment due to unfavourable supply-demand condition in the industry.

• Against estimates: Inline. 1HFY22 net profit of RM136.1m was inline with our in-house and the street estimates which made up 46.5% and 40.3% of our full year forecast respectively.

• Outlook. Outlook for 2HFY22 may remain challenging as ASP is expected to decline further amid current mismatch in supply and demand dynamics. As we in the transition phase towards full endemicity phase, we expect ASP to drop to below pre-pandemic level, c.USD23/1k pcs-USD25/1k pcs for FY22F-FY24F. Besides, margin is expected to under pressure which may be eroded by higher operating cost following an increase in natural gas price and electricity tariffs

• Earnings revision. No change in our earnings forecast.

• Our call. Maintain a HOLD call with a lower target price of RM1.24 (from RM1.80 previously) as we assigned a lower PE for Kossan given its less-than-favourale outlook due to stiff competition in rubber glove industry. This will be further dragged by unattractive ASP and lower sales volume arising from shipping constraints. Our valuation is pegged at a PER of 10.2x (20% discount from average 5-years preCovid-19 mean PE of 12.7x) to FY23F EPS of 12.2 sen.

Source: BIMB Securities Research - 27 Jul 2022