KOSSAN’s 1QFY23 results missed expectations due to weak sales volume and margins. The group reiterated that the challenging and competitive business landscape will persist throughout 2023. We almost triple our FY23F net loss forecast to RM76m (from RM28m) but keep our FY24F number. We keep our asset-based TP unchanged at RM0.85. Reiterate UNDERPERFORM.

KOSSAN disappointed with a second consecutive quarterly loss, registering a net loss of RM24m in 1QFY23 compared to our full-year net loss forecast of RM28m and the full-year consensus net profit estimate of RM60m. The variance against our forecast came largely from weaker-than expected sales volume and margins.

QoQ, its 1QFY23 revenue fell 18% due to lower ASP (-3%) and volume sales (-15%). EBITDA plunged 82% due to: (i) excessive industry capacity leading to the reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of a further price decline, (ii) margin erosion as costs remain elevated including natural gas and electricity tariff, and labour costs against falling selling prices, and (iii) reduced economies of scale, particularly, poor cost absorption, as its utilisation rate continues to remain weak. As a result, 1QFY23 losses widened to RM24m compared to RM8m in 4QFY22. No dividend was declared in this quarter as expected.

YoY, its 1QFY23 revenue dropped 43% due to lower ASP (-25%) and volume sales (-28%). This brings 1QFY23 core net loss to RM24m compared to a profit of RM90m in 1QFY22.

Outlook. MARGMA projects 12%-15% growth in the global demand for rubber gloves annually from 2023, following an estimated 19% contraction to 399b pieces in 2022. It believes the supply-demand equilibrium may return in 6-9 months. However, we beg to differ, expecting the overcapacity situation to persist at least over the next two years. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness. Still, capacity is seen to expand further in 2023.

We project the demand for gloves to rise by 15% in 2023, which is consistent with MARGMA’s forecast. However, this will do little to ease the overcapacity situation as the global glove production capacity will grow by 16% to 595b pieces during the year as more capacity planned by incumbent and new players during the pandemic years — enticed by super-fat margins that had evaporated — finally come online. This will result in the excess capacity rising by 22% to 137b pieces from 112b pieces in 2022. The expanded overcapacity means low prices and depressed plant utilisation will likely persist in 2023. Not helping the already dire situation is the reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of a further decline in prices.

Forecasts. We almost triple our FY23F net loss forecast to RM76m (from RM28m) as we reduce our utilisation assumption to 35% from 45% and cut EBITDA margin assumption to 1% from 5%. However, we keep our FY24F number.

Reiterate UNDERPERFORM. Our TP is unchanged at RM0.85 based on 0.6x FY24F BVPS, at 60% discount to the sector’s average of 1.7x charted during previous downturns in 2008−2011 and 2014−2015 as we believe the current downturn could be one of the deepest ever after imputing a 5% discount for a 2-star ESG rating as appraised by us (see Page 4).

Key risks to our recommendation: (i) the industry turning the corner sooner on stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (ii) industry consolidation reducing competition among players, and (iii) epidemic and pandemic occurrences.

Source: Kenanga Research - 28 Apr 2023