• Maintain SELL (TP: 1.33). Kossan’s registered a core LATAMI of RM25.6mn during FY23, which came in below our in-house and street estimates. The lower-than-expected earnings were due to a one-off impairment loss and write off of plant and machinery, couple with lower sales volume and ASP as well as higher operating costs. Kossan’s 4QFY23 experienced a slight 0.8% QoQ decline in revenue, primarily attributed to a sluggish PBT margin that decreased by 11.3 ppts QoQ. This decline can be attributed to weakened demand and increased operating costs particularly in natural gas. We make no changes to Kossan’s FY24-25F earning forecast. Although Kossan faced a challenging quarter in 4QFY23 and leading to a decline in overall FY23 earnings, we anticipate continued small order replenishments to support the growth of the company though overall weak in industry demand. Maintain a SELL call for Kossan with unchanged TP of RM1.33. Our valuation is pegged at Kossan’s 3-years pre-Covid historical forward PE of 43x to FY24F of 3.1sen.

• Key Highlight. FY23 witnessed a downturn in overall performance attributed to weak demand and reduced ASP stemming from intense market competition, notably from Chinese players. Additionally, a rise in natural gas costs squeezed margins, despite stability in raw material prices.

• Earnings revision. Unchanged.

• Outlook. Moving forward, we anticipate Kossan to rebound with positive earnings driven by sustainable sales volume amid bottomed out ASP. Despite prevailing weak demand, several factors are expected to contribute to the company's improved performance, including continuous small orders, a sustainable cost structure, and well-managed operating expenses. Additionally, the strategic decommissioning of a production facility within the industry is seen as a proactive measure to alleviate industry oversupply, thereby fostering market normalisation. However, caution is warranted regarding additional capacity from Chinese players, which could potentially exacerbate industry challenges.

Source: BIMB Securities Research - 23 Feb 2024