• Downgraded to HOLD (TP of RM2.00). Kossan’s 9MFY24 core PATAMI of RM66.1mn was below our in-house and market expectation, make up only 57.7% and 51.2% respectively. The deviation was mainly due to lower-than-expected sales volume and higher raw material costs. An interim DPS of 2sen and special dividend of 6sen were declared, resulting in a total dividend of 8sen. 3QFY24 revenue increase 18% QoQ underpinned by delayed in order in last quarter. However, PBT margin down by 1.1ppts QOQ, due to unrealised foreign exchange loss. Kossan near term earnings growth remain positive, driven by sustainable sales volumes and steady order replenishment. However, the broader rubber glove industry recovery remains uncertain due to structural challenges, including oversupply from Chinese manufacturers. We downgrade Kossan to SELL call from HOLD with lower TP of RM2.00 (RM2.03 previously) following our earnings downgrade. Our valuation now is based on Kossan’s 3-years average pre-Covid forward PE of 19x pegged to FY26F EPS of 10.5.

• Key Highlight. 9MFY24 revenue and PBT increased by 17.2% YoY and 268.1% YoY respectively, thanks to higher sales volume and improved production efficiencies. The company could face potential challenges from a shortage of foreign workers as U.S. consumer demand shift from Chinese to Malaysian production following China’s new rate hikes, especially given it has already undergone post-consolidation and capacity adjustments.

• Earnings revision. We cut FY24-26F earnings forecast by 7-10% to RM106-269mn to account for lower margin and sales assumption.

• Outlook. The near-term outlook remain promising, supported by stock replenishment by customers, which is expected to enhance Kossan's sales volumes. Additionally, the US decision to increase tariffs on Chinese medical and surgical gloves is a positive development that could redirect customer demand towards Malaysian manufacturers. Nevertheless, we remain cautious on the rubber glove industry’s full recovery to pre-COVID levels, as structural challenges particularly the oversupply from significant Chinese production are likely to persist as major hurdles.

Source: BIMB Securities Research - 18 Nov 2024