• Maintain SELL (TP of RM2.03). Kossan’s posted a core PATAMI of RM31.5mn during 1QFY24, which came above our in-house expectation at 34.6% but within street estimates at 21.5%. The better earnings were underpinned by higher sales volume and lower natural gas prices. We increased our FY24-25F earnings forecast by 16-76% to RM106-200mn to account for higher sales volume. We expect Kossan to sustain positive earnings driven by improved sales volumes and consistent order replenishment despite demand remaining below pre-COVID-19 levels. Nonetheless, we think the stock price is running ahead of its fundamentals and therefore we advise investors to revisit at lower levels. Maintain a SELL call for Kossan with higher TP of RM2.03 (RM1.33 previously) based on Kossan’s 3-years average pre-Covid forward PE of 19x pegged to FY26F EPS of 10.7sen.

• Key Highlight. Kossan’s 1QFY24 revenue jumped 12.8% QoQ while PBT margin improved by 8.2ppts QoQ. Improved sales volume was spurred by continuous small orders from customers amid the lagged impact of the previous decline in natural gas prices. Nonetheless, we remain cautious on the 2QFY24 earnings given the recent hike in nitrile and latex prices. Noted that nitrile and latex soared 34% YoY and 35% YoY respectively as at year-to-date.

• Earnings revision. We increase our FY24-25F earnings forecast by 16- 76% to RM106-200mn as we revised higher our sales volume assumption. We also introduced FY26F earnings forecast of RM273mn.

• Outlook. We expect Kossan to sustain positive earnings driven by improved sales volumes. While demand remains below pre-COVID-19 levels, consistent order replenishment is likely to support earnings. Overall, we are optimistic about the rubber glove industry's recovery from its low with improved demand and bottoming ASP.

Source: BIMB Securities Research - 23 May 2024