Kenanga Research & Investment

Kossan Rubber Industries - Bumpy Recovery Path

Publish date: Fri, 23 Feb 2024, 10:50 AM

KOSSAN’s FY23 results beat our forecast (due to lower-thanexpected input cost) but met market expectations. We believe the sector’s recovery path remains bumpy with continued predatory pricing by certain overseas players and massive overcapacity. We raise our FY24F net profit forecast by 33%, lift our TP by 6% to RM1.48 (from RM1.34) but reiterate UNDERPERFORM.

KOSSAN’s FY23 results beat our forecast by 12% but met market expectations. The variance against our forecast came largely from lowerthan-expected input cost.

QoQ, its 4QFY23 revenue fell 1%, we posit, due to lower volume sales. Its EBITDA fell 19% in 4QFY23, we believe, due to (i) higher input nitrile butadiene rubber price (+11%), and (iii) reduced economies of scale, particularly, poor cost absorption, as its utilisation rate continued to remain weak. As a result, its 4QFY23 core net profit fell 12% to RM36m. A pleasant surprise was a 2.0 sen dividend declared which came in above our expectation.

YoY, its FY23 revenue dropped 33% due to lower ASP and volume sales. This brings FY23 core net profit to RM50m (-68%).

Outlook. The industry expect volatile quarterly sales order as distributors or buyers sees no urgency to place sizeable orders or hold substantial stocks as supply is plentiful and readily available. We expect the operating environment to remain challenging in subsequent quarters, plagued by predatory pricing by certain overseas players (i.e. selling below cost over an extended period of time to eliminate competitors) and massive oversupply.

Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 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. MARGMA projects 12%−15% growth in the global demand for rubber gloves annually from CY23, following an estimated 25% contraction to 300b pieces in CY23. We project the demand for gloves to rise by 30% in CY24 to 390b pieces (due to a low base effect in CY23) and resume its organic growth of 15% thereafter. This will result in an excess capacity of 212b pieces in CY24. The overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry in CY24.

Forecasts. We raise our FY24F net profit by 33% as we lift our EBITDA margin assumption to 16% (from 14%) and introduce our FY25F numbers.

Valuations. Consequently, we raise our TP by 6% to RM1.48 (previously RM1.34), also to reflect the rolling forward of our valuation base year to FY25F (from FY24F). The basis of our TP is based on 1.0x FY24F BVPS, at 40% discount to the sector’s average of 1.7x charted during previous downturns in 2008−2011 and 2014−2015. Our TP reflects a 5% discount to account for a 2-star ESG rating as appraised by us (see Page 4).

At 43x forward PER and forward ROE of 3%, its valuations are lofty despite the improved outlook. Reiterate UNDERPERFORM.

Key risks to our recommendation are: (i) certain Chinese glove giants stop their predatory pricing strategy (i.e. selling below cost over an extended period of time to eliminate competitors), leading to a strong earnings rebound for the sector, (ii) stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (iii) industry consolidation reducing competition among players, and (iv) epidemic and pandemic occurrences.

Source: Kenanga Research - 23 Feb 2024

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