KOSSAN’s 1QFY24 results met expectations. It returned to the black in 1QFY24 from a year ago in the absence of high-cost inventory. Massive overcapacity will continue to weigh on the sector’s outlook. We maintain our earnings forecasts, TP of RM1.48 and UNDERPERFORM call.

Its1QFY24 net profit met expectations at 26% and 23% of our full-year forecast and the full-year consensus estimate, respectively. No dividend was declared which came in within our expectation.

YoY, its 1QFY24 revenue rose 14% largely due to higher sales volume, partially offset by, we believe, a slightly lower ASP. It returned to the black at the net level from a loss a year ago in the absence of high-cost inventory (which weighed on its performance a year ago).

QoQ, its1QFY24 revenue rose 13% due to a higher sales volume and we believe, a slight improvement in ASP. However, its core net profit declined by 13% due to: (i) higher cost of input nitrile butadiene rubber (+8%), (ii) weaker showing from its technical rubber products due to higher cost of input latex, and (iii) a higher effective tax rate.

Outlook. KOSSAN guided for the challenging operating environment to persist throughout FY24 as players continue to grapple with massive overcapacity, subdued ASPs and high input cost. The visibility for new orders is weak as distributors or end-users see no urgency to place sizeable orders or hold substantial stocks as the supply is plentiful and readily available. Not helping either, is predatory pricing by certain overseas players (i.e. selling below cost over an extended period of time to eliminate competitors).

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. Maintained.

Valuations. Our TP is RM1.48 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 50x 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 May 2024