• Maintain SELL, with a higher DCF-derived MYR0.91 TP from MYR0.86, 25% downside. 9M22 earnings came in above our and Street’s expectations. ASP moderated by 2-6% QoQ while utilisation rate was 40- 50%. Looking ahead, management reiterated a challenging environment for 4Q22 and 2023 on the back of persisting demand-supply imbalance, high energy prices, and labour costs. As valuation ran up recently, coupled with the lack of near-term re-rating catalysts, we maintain our call.

• 9M22 results overview. 3Q22 core net profit was MYR23.7m (-47% QoQ and -96% YoY), bringing 9M22 to MYR158m (-94% YoY), which accounted for 97% and 78% of our and Street’s estimates. Despite the better-than- expected performance, Kossan Rubber expects its near-term outlook to remain choppy as the current industry demand-supply imbalance, elevated energy prices and labour cost may continue to loom over its 2023 outlook. ASP erosion has moderated to 2-6% QoQ vs the 10-15% QoQ decline in the previous quarter. No dividend was declared during the quarter.

• Volume and cost. 3Q22 sales volume declined 14-18% QoQ, of which utilisation rate stood at 40-50% (vs 65-70% in 2Q22) and was largely in line with the industry average of 50%. Nitrile butadiene rubber or NBR swelled 8-12% QoQ whereas natural rubber or NR eased 12-16% QoQ. To put things worse, the current industry gas tariff is said to have increased by 20- 25% in 4Q22 following the surge in natural gas prices.

• Outlook. The market dynamics remain largely unchanged despite the recent rally on glove stocks, which is likely driven by the strengthening USD against the MYR and the resurgence of the new COVID-19 variant leading to higher confirmed cases. However, our channel checks indicate that glove makers have yet to receive any spike in orders despite the outbreak of the new variant – this could suggest the current demand-supply dynamics remain unsustainable. While ASP erosion is appearing to moderate, the ongoing subdued demand outlook (leading to low plant utilisation rate) and stubbornly elevated raw material prices could continue to weigh on the sector’s margin.

• Earnings adjustment. We cut our earnings by 2% for FY22F, after revising our gas tariff assumption to factor in the latest change in gas tariffs. Our FY22F remains below current consensus figures.

• Maintain SELL, with higher TP of MYR0.91 after writing off our dividend payout assumption for FY22F-23F. Our TP implies 14x FY23 P/E, or -0.2SD from its historical mean. Current valuation appears rich, at 19x against our FY23F EPS. We incorporate an 8% ESG discount to our intrinsic value to derive our TP as its ESG score of 2.6 stands below the country median.

Source: RHB Research - 3 Nov 2022