Kossan’s 2QFY22 core PATAMI of RM43.4m (-49% QoQ, -96% YoY) brought 1HFY22 core PATAMI to RM128.2m (-94% YoY). Its performance came in within our but was below consensus projections of 48% and 44% respectively. We believe industry headwinds are unlikely to dissipate soon, given the oversupply situation that will continue to keep ASPs depressed. We make no changes to our earnings projections. Maintain HOLD on Kossan, with an unchanged TP of RM1.44, implying a PE multiple of 14.9x on its FY23f EPS of 9.7sen.

Inline. Kossan’s 2QFY22 core PATAMI of RM43.4m (-49% QoQ, -96% YoY) brought 1HFY22 core PATAMI to RM128.2m (-94% YoY). Its performance came in within our (48%) but was below consensus (44%) full year estimates. 2QFY22 core PATAMI was arrived at after stripping out EIs (mainly forex gains) amounting to RM2.6m

Dividend. None declared (2Q21: 12 sen). 1H22: None declared (1H21: 24 sen).

QoQ. Sales volume for the quarter remained relatively flat (-1%), but ASP has continued to decline further, by 10-15% given the oversupply situation in the market, which has subsequently resulted in revenue declining by 15%. Raw material prices inched up during the quarter, with NBR prices rising by 3-8%, while NR prices saw a lower increment of 1-5%. Given the falling ASPs and rising operating costs, Kossan’s margins have continued to come under pressure, whereby its EBITDA margins narrowed by c.6ppts. All in all, core PATAMI fell by 49%.

YoY. As a result of intensified competition in the marketplace, revenue suffered a 74% drop, due to lower ASP (-65% to -70%) and decline in sales volume (-23% to -28%). Margins have also continued to narrow on the back of diminishing operating leverage, which saw EBITDA margins compressing by 48ppts. Raw material costs were mixed, as NBR prices fell 50-55%, but NR prices registered a 5-10% increase. Consequently, core PATAMI was 96% lower.

YTD. Revenue fell 71% owing to weaker ASPs (-62% to -67%) and lower sales volume (-23% to -28%). ASPs declined at a faster pace than raw material prices, as well as inflationary pressures have continued to drag margins lower – EBITDA margins declined by 45ppts. This has ultimately led to core PATAMI slumping by 94%.

Outlook. In view of the oversupply situation and higher investment costs to construct new manufacturing plants, Kossan has put its expansion plans on hold for now, as it still has idle capacity available to take on any additional incoming orders. In our view, the recent freeze order on Indonesian workers is also unlikely to significantly impact Kossan, owing to (i) availability of foreign workers from other countries, (ii) Kossan not expecting to commission additional plants in CY22, and (iii) flexibility to hire local workers. At present, 50% of the general workers are made up of foreign workers, from 80% previously. On a side note, margin pressures are also expected to persist, given its inability to fully pass on the cost increase amidst oversupply situation.

Forecast. Unchanged as Results Were Inline.

Reiterate HOLD, TP: RM1.44. Despite the industry headwinds are not expected to dissipate so soon, we think that Kossan’s relatively smaller production capacity is a redeeming feature – any potential increase in orders are more likely to fill up Kossan’s capacity sooner, improving overall utilisation rate. Not to mention that Kossan also has a high net cash to market capitalisation ratio of 59.9%, which would help the group to better weather through this challenging time. Maintain our HOLD recommendation on Kossan, with unchanged TP of RM1.44, implying a PE of 14.9x on its FY23f EPS of 9.7sen.

Source: Hong Leong Investment Bank Research - 27 Jul 2022