KOSSAN : A breakout?

The prime name. Investor interest in glove stocks has reignited following the US Trade Representative’s announcement of steep tariff hikes on medical and surgical gloves imported from China. With tariff rates set to rise from 7.5% to 50% in 2025 and 100% by 2026, this has sparked renewed enthusiasm for the sector, driven by (i) a more favourable operating environment and (ii) an encouraging earnings recovery outlook. Further bolstering this outlook, the election of Donald Trump as the 47th President of the US, with his hard-line stance against China, could accelerate the shift of US importers' orders to Malaysian manufacturers. Among the listed glove players on Bursa Malaysia, KOSSAN and HARTA are poised to benefit the most, given their relatively higher exposure to the North American market.

Sequential earnings growth ahead. We expect Kossan to deliver stronger sequential earnings from 4QFY24 onwards, supported by (i) an ongoing inventory replenishment cycle, (ii) potential trade diversion from US customers to Malaysia due to the US FDA import alert and higher tariffs on Chinese gloves effective January 2025, and (iii) improved profit margins driven by economies of scale. Specifically, we anticipate 8-10% QoQ sales volume growth in Kossan’s glove and clean-room segments in the upcoming quarter. Additionally, margins are expected to expand as the group plans to raise its ASP for rubber gloves by approximately USD1-2 per 1,000 pieces. This margin expansion is likely to be further supported in subsequent quarters by the absence of forex headwinds and the added benefit of a “US-premium”.

Pending breakout. KOSSAN is pending a breakout above long-term hurdle of RM2.50, with indicators showing uptick bias. A successful breakout above the said region will spur greater upside toward RN2.65-2.72-2.83 region. Cut loss at RM2.23.

Collection range: RM2.28-2.32-2.46

Upside targets: RM2.65-2.72-2.83

Cut loss: RM2.23

Source: Hong Leong Investment Bank Research - 21 Nov 2024