Kossan Rubber Industries Berhad (Kossan) registered a PATAMI of  RM24.3mn in 1QFY23, that came in below our in-house and market  forecast. We expect margin to remain under pressure due to higher  operating cost following cost pressure particularly natural gas and  electricity tariffs. Maintain a SELL call on Kossan, with unchanged TP  of RM0.95.

• Below expectations. 1QFY23 LATAMI of RM24.3mn was below our inhouse and street estimates, given higher-than expected energy costs  as well as lower-than-expected sales volume.

• Dividend. No dividend was declared during the quarter under review.

• QoQ. Revenue declined by 18% QoQ, no thanks to lower average  selling price (ASP) (declined by c.3-5% QoQ) and sales volume (dropped by c.14-18% QoQ). Meanwhile, Kossan registered loss  before tax (LBT) of RM19.1mn (vs PBT of RM1mn in 4QFY22) no  thanks to stiff market competition, lower customer restocking  activities and lower plant utilisation. On top of that, Kossan’s  performance during this period was affected by higher energy costs  due to an increase in natural gas and electricity tariffs despite a  decline in raw material prices.

• YoY. Revenue down by 42.5% YoY whilst posted LBT of RM19.1mn (vs  PBT of RM119.8mn during 1QFY22). The uninspiring performance  was dented by substantial decline in ASP and sales volume which  tumbled c.25.5% YoY and c.30.5% YoY respectively. On top of that,  PBT margin slipped 22.3 ppts YoY due higher operating costs (natural  gas and electricity cost) despite a decline in natural rubber (-17.5%  YoY) and latex (-27.5% YoY) prices.

• Outlook. Management foresee FY23 performance to remain  challenging given oversupply situation on top of higher operating  costs, a dampener to margin. Besides, we expect margin to remain  under pressure due to higher operating cost following an uptrend in natural gas and electricity tariffs. However, we anticipate Kossan to  register smaller losses in next quarter and to turnaround from 3QFY23  onward banking on market consolidation following the exit of small  players, hence, giving calm to the oversupply situation.

• Forecast. No change to our earnings forecasts. Maintain SELL, TP: RM0.95. Maintain a SELL call on Kossan with an unchanged target price of RM0.95, pegged at average 5-year pre  COVID19 mean PE of 21.1x to FY24F EPS of 4.5 sen. We foresee a lessthan-favourable outlook for Kossan due to 1) stiff competition 2)  unattractive ASP and 3) lower sales volume.

Source: BIMB Securities Research - 28 Apr 2023