Kossan’s 4QFY22 core LATAMI of -RM0.2m (vs 3QFY22: RM25.2m, 4QFY21: RM212.3m), brought FY22 core PATAMI to RM156.9m (-94.6% YoY). The performance came in below both our and consensus estimates at 85% and 91% respectively, key variance was due to lower-than-expected revenue. Cut earnings projections for FY23f/24f to -RM47.6/RM126.3m (from -RM29.4m/RM150.9m previously) as we lowered our revenue forecast. TP unchanged at RM1.00, valued at P/B of 0.66x on its FY23f BVPS of RM1.51; recent optimism in share price was partially fuelled by news of the avian flu. However, we think that this is not sustainable as the bird flu scare is less likely to develop into the scale of the Covid-19 pandemic. Also, we could likely see a knee-jerk reaction to Kossan’s reported losses. Hence, we would only turn keen buyers closer to the RM0.90 level (providing a comfortable upside of ~11% to our TP). Keep HOLD on Kossan.

Missing estimates. Kossan’s 4QFY22 core LATAMI of -RM0.2m (vs 3QFY22: RM25.2m, 4QFY21: RM212.3m), brought FY22 core PATAMI to RM156.9m (-94.6% YoY). The performance came in below both our and consensus estimates at 85% and 91% respectively. Key variance was due to lower-than-expected revenue. Weak showing was a result of low ASPs, rising input costs and low utilisation rates. 4QFY22 core LATAMI was arrived at after adding back forex losses amounting to RM2.3m.

Dividend. Declared dividend of 2.5 sen, going ex on 7 Mar 2023 (4Q21: 12 sen). FY22: 2.5 sen (FY21: 48 sen).

QoQ. Revenue fell 14.1% on the back of lower sales volume (-1 to -3%) and glove ASPs (-10% to -15%) as competition in the marketplace persists. Despite lower raw material prices (NBR: -27% to -32%, NR: -19% to 21%), margins have continued to decline as we believe the savings from lower raw material costs were offset by higher energy and natural gas costs. With that, Kossan reported a core LATAMI of -RM0.2m (vs 3QFY22: RM25.2m).

YoY. Revenue reported a 48% decline, owing to both lower ASPs (-42% to -47%) and sales volumes (-25% to -27%). As demand for glove eases, raw material prices also tapered off on a YoY basis (NBR: -50% to -55%, NR: -12% to 14%). That however, was neutralised by the hike in other input costs (i.e. labour, energy and fuel costs) as well as low plant utilisation rates. As a result of that, Kossan’s reported a 4QFY22 core LATAMI of -RM0.2m (vs 4QFY22: RM212.3m).

YTD. Falling ASPs (-58% to -63%) and sales volume (-23% to -25%) led to Kossan’s revenue dipping 65% YoY. Coupled with inflationary cost pressures (higher energy, labour and fuel costs) and low plant usage rate, margins have continued to compress, resulting in core PATAMI plummeting by a much larger magnitude of 95%.

Outlook. The expected increase in costs will continue to exert downward pressure on Kossan’s profitability, as natural gas costs have increased by c.16% in January, now accounting for c.30% of its total production costs. Electricity costs have also increased by c.30%. Based on its latest disclosures, Kossan is current sitting on a net cash position of RM2bn, which translates to a net cash per share of 78 sen. The large cash pile accumulated will help Kossan to better navigate the downturn.

Forecast. We reduce our earnings projections for FY23f/24f to -RM47.6/RM126.3m (from -RM29.4m/RM150.9m previously) as we lowered our revenue assumptions.

Reiterate HOLD, TP: RM1.00. Recent optimism in share price was partially fuelled by news of the avian flu, as the market expects this to potentially spur more glove buying activities. However, we think that this is not sustainable as the bird flu scare is less likely to develop into the scale of Covid-19 pandemic. Also, we could likely see a knee jerk reaction to Kossan’s reported losses. Thus, we would only turn keen buyers closer to the RM0.90 level (providing a comfortable upside of ~11% to our TP). Keep HOLD on Kossan.

Source: Hong Leong Investment Bank Research - 17 Feb 2023