Kossan’s 3QFY22 core PATAMI of RM25.2m (-42% QoQ, -95% YoY) brought 9MFY22’s sum to RM153.4m (-94% YoY). The performance came in below ours (58%) but was within consensus estimates (71%). We cut our earnings forecasts for FY22-24f by 4-32%, as we lower our utilisation rate assumption to better reflect the current low run rates faced industry-wide. TP is lowered to RM1.12 (from RM1.44 previously) following our earnings adjustment, representing a PE of 14.9x on its FY23f EPS of 7.5sen. Reiterate HOLD.

Missing estimates. Kossan’s 3QFY22 core PATAMI of RM25.2m (-42% QoQ, -95% YoY) brought 9MFY22 core PATAMI of RM 153.4m (-94% YoY). The performance came in below ours (58%) but was within consensus estimates (71%). 3QFY22 core PATAMI was arrived at after adding back for forex losses amounting to RM1.95m.

Dividend. None Declared (3Q21: 12 Sen). 9M22: None Declared (9M21: 36 Sen).

QoQ. Revenue slid by 5% as both sales volume (-14% to -18%) and glove ASPs (-2% to -6%) continued to be on a downtrend, owing to the glove demand-supply mismatch in the market. Raw material prices were mixed, with NBR prices inching up 8 to 12%, while NR prices fell by 12-16% (we believe is due to the ending of wintering season for rubber trees). That said, EBIT margins have continued to narrow, by c.6ppts QoQ to 5.2%, due to operating leverage effect (3Q22 utilisation rate 40-50% vs 2Q22 utilisation rate 60-70%) and increase in other operating expenses like labour costs. All in, core PATAMI registered a 42% decline.

YoY. Revenue declined by 57% on the back of lower sales volume (-11% to -15%) and ASP (-58% to -62%) as the competition in the marketplace persist. NBR prices fell by 40-44% on lower demand from glove makers, while NR prices increased by 7-11%. As a result of falling revenue, operating leverage effect and higher operating costs, core PATAMI plummeted by 95%.

YTD. Revenue fell 68% due to both weaker ASPs (-61% to -65%) and lower sales volume (-21% to -25%). Declining ASPs, coupled with inflationary pressures, has led to EBIT margins narrowing by c.50ppts to 12%. Not to mention that the decline in NBR prices (-39% to 43%) also did not match the steep decline in ASPs. Consequently, core PATAMI also saw a 94% plunge.

Outlook. Following the glove capacity overexpansion episode during the pandemic, we think that the oversupply situation is unlikely to dissipate in the short term. While some glove players are attempting to raise ASPs in hope to stabilise the market price, we think that the glove ASPs could potentially continue to inch lower, albeit at a much slower rate. Utilisation rates are also expected to remain low in the near term, given the weak demand for gloves.

Forecast. We lower our earnings forecasts for FY22-24f by 4-32%, mainly on lower utilisation rate assumption, to better reflect the current low run rates faced industrywide, as a result of weak glove demand.

Reiterate HOLD, lower TP to RM1.12. While the headwinds faced by the glove industry is likely to persist in the short term and the higher energy and labour costs will continue to plague glove makers, we are maintaining our HOLD recommendation on Kossan as we believe its strong net cash position will help the Group to better weather through this difficult time (Kossan has a net cash to market capitalisation ratio of 61.8%). Our TP is, however, lowered to RM1.12 following our earnings adjustment, representing a PE of 14.9x (-1.5SD below pre-pandemic mean) on its FY23f EPS of 7.5sen.

Source: Hong Leong Investment Bank Research - 3 Nov 2022