Kossan Rubber Industries Berhad (Kossan) LATAMI of RM3.3mn in 2QFY23, came in within our and consensus’ full year earnings forecast. We foresee the industry is expected to face challenges due to a combination of weak demand and an oversupply of production capacity. Maintain SELL on Kossan, with unchanged TP of RM0.95.

• Within expectations. We deem 1HFY23 LATAMI of RM27.6mn was within our in-house and street estimates, amid small losses registered during 2QFY23.

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

• QoQ. Revenue decline 1.8% QoQ, no thanks to lower sales volume which declined about 3% to 5% QoQ. On the other hand, PBT margin improved by 5.5ppts QoQ to 0.7% on lower energy costs following recent decline in natural gas price. We understand that the ASP remained relatively unchanged compared to the previous quarter, indicating that it has likely reached its lowest point from our view.

• YoY. Revenue dropped 34% YoY primarily due to the lower ASP and decrease in sales volume. The ASP showed a significant decline of c. 30- 35% YoY while the sales volume contracted by c.15-20% YoY. One the same note, PBT margin depleted 10.3ppts YoY following higher energy costs as well as lower utilisation rate which significantly impacted the overall PBT margin.

• YTD. As for 1HFY23, revenue slid 38.6% YoY while recorded a LBT of RM16.5mn, no thanks to tough operating environment that clouding the entire industry due to rising input costs and persistent supply and demand imbalance that hurt ASP and utilisation rate. Despite the efforts made by glove manufacturers to reduce capacity in the market, weak demand continues to persist due to the presence of excess capacity.

• Outlook. The management anticipates that the performance for the remaining FY23 will continue to be challenging. This outlook is primarily due to the prevailing oversupply situation, which is expected to persist and pose significant hurdles to the company's performance. Nonetheless, we foresee recent decline in natural gas price is expected to contribute to a more stable operational cost environment for the group. Besides, we anticipate Kossan’s earnings to rebound in the upcoming quarters, banking on market consolidation following the exit of small players as well as production cut by local gloves players and hence, giving a marginal 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-years pre COVID19 mean PE of 21.1x to FY24F EPS of 4.5 sen. We foresee the industry is expected to face challenges due to a combination of weak demand and an oversupply of production capacity - with the anticipated effects of capacity decommissioning and the closure of smaller players being delayed as well as intense glove production from Chinese players.

Source: BIMB Securities Research - 28 Jul 2023