Kossan’s FY21 core PATAMI of RM2,865.2m (+161% YoY) was within both our and consensus estimates at 97% and 95% respectively. Going forward, we expect industry-wide headwinds to continue to linger, with ASPs and margins remaining under pressure. Despite the results coming inline, we lower our earnings forecasts for FY22-23f by 43-67%, to account for the lower ASP as well as higher operating costs. Consequently, our TP is lowered from RM2.65 to RM1.53, implying a valuation of 12.0x PE (at -0.5SD of its 5-year average) on its FY22f EPS of 12.7sen.

Finishing in line. Kossan’s 4QFY21 core PATAMI of RM225.0m (-58% QoQ, -59% YoY) brought FY21 core net profit to RM2,865.2m (+161 YoY). The results were within both our and consensus full-year forecasts, at 97% and 95% respectively. FY21 core PATAMI was arrived at after adjusting for a forex gain of c.RM1m.

Dividend. Declared DPS of 12 sen, going ex on 5 Apr 2021 (4Q20: 11sen). FY21: 48 sen vs FY20: 14 sen.

QoQ. Despite sales volume growing by 13-18%, Kossan suffered a 29% decline in revenue as the fall in ASP (-35-40%) had neutralized the positive effects of higher sales volume. The improvement in sales volume was a combination of low base effect (imposition of EMCO in 3Q), restocking by clients as well as orders that were unable to be delivered in 3Q being shipped out in 4Q. The growth in sales volume could have been stronger QoQ, should there be no shipping disruptions in 4Q. Margins have continued to come under pressure as NBR prices (-25-30%) decline at a slower rate compared to the ASPs. Core PATAMI was 58% lower as a result.

YoY. Decline in sales volume (-14-19%) and lower ASPs (-17-22%) have resulted in lower revenue of 29% YoY. The decline in sales volume was partially affected by the inability to ship out glove supplies (due to shipping disruptions) as well as tapering glove demand. Margins continued to narrow, with EBIT margins falling 29 ppts QoQ, due to the diminishing operating leverage. Core PATAMI was subsequently down by 59%.

YTD. Stronger ASP (+107-112%) has led to an 83% leap in revenue, despite sales volume decreasing by 8 to 13%. The decline in volume YoY was due to the closure of plants during 3Q due to imposition of EMCO as well as the 60% workforce limitation. The sharp increase in ASP was more than enough to compensate for the higher raw material price (NBR: +62-67%; NR: +14-16%), resulting in an EBIT margin expansion of 16 ppts. This has ultimately led to core PATAMI growing by 161%.

Outlook. We expect industry-wide headwinds to continue to linger in the near-term, as supply continues to outpace demand, leading to tighter competition within the industry. ASP is expected to continue falling as a result. Although raw material prices have been coming off gradually, given the inflationary pressure in other aspects (ie: higher energy and labour costs), we expect margins to continue to normalize closer to pre-Covid levels.

Forecast. Despite the results coming inline, we lower our FY22-23f forecasts by 43- 67%, to account for the lower ASP as well higher operating costs.

Reiterate HOLD, TP: RM1.53. Following our earnings adjustment, our TP is lowered from RM2.65 to RM1.53, implying a PE multiple of 12.0x (at -0.5SD of its 5-year average) on its FY22f EPS of 12.7sen.

Source: Hong Leong Investment Bank Research - 18 Feb 2022