• Upgraded to HOLD (TP: 1.33). Kossan’s 9MFY23 core PATAMI of RM13.4mn came in below our in-house (18.7%) but above street estimates. The lower-than-expected earnings were due to lower sales volume and ASP on top with higher operating costs against our forecasts. Kossan’s 3QFY23 revenue escalated 4.1% QoQ to RM403.5mn. Meanwhile core PATAMI turned around to RM41mn compared to the core LATAMI of RM3.3mn in 2QFY23, thanks to increased sales volume and improved cost control, facilitated by lower prices of natural gas and raw materials. We cut lower our FY23-25F earnings assumption by 25- 36.3% to RM45-100.3mn respectively to account for lower ASP assumption. We expect Kossan to maintain positive earnings through improved sales volume and operating margins. Despite weak demand, ongoing small order replenishments, a sustainable cost structure, and manageable operating costs can enhance the group’s performance. Upgraded to a HOLD call for Kossan from SELL with a higher TP of RM1.33 (RM0.95 previously) as we change our valuation to FY24. Our valuation is now pegged at Kossaan’s 3-yrs pre-Covid hist. forward PE of 43x to FY24F of 3.1sen.

• Key Highlight. There was a notable uptick of 5-15% in quarterly sales orders despite a corresponding decline in the ASP by c.3-5%. Cost wise, nitrile price experienced a substantial decline by 15-20% QoQ, whereas the natural rubber price decreased by 4-9% QoQ, therefore resulting in a 12.5ppts increase in PBT margin QoQ.

• Earnings revision. We cut lower our FY23-FY25F earnings assumption by 25%-36.3% to RM45mn-100.3mn respectively, to account for lower ASP assumption.

• Outlook. We expect Kossan to maintain positive earnings through improved sales volume and operating margins. Despite weak demand, the combination of ongoing small order replenishments, a sustainable cost structure, and manageable operating costs can enhance the group’s performance. Additionally, the decommissioning of production facility within the industry is seen as a step toward reducing industry oversupply for market normalization.

Source: BIMB Securities Research - 16 Nov 2023