RHB Investment Research Reports

Kossan Rubber - Meaningful Margin Expansion; Still BUY

Publish date: Thu, 23 May 2024, 11:20 AM
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  • Maintain BUY, higher DCF-derived MYR2.73 TP (from MYR2.65), 12% upside, c.1% yield. We deem Kossan Rubber’s 1Q24 core profit of MYR25m to be in line, as we expect it to deliver stronger earnings in the coming quarters, given customers’ improving acceptance of ASP hikes, greater demand visibility, and the stabilisation of raw material prices. 1Q24 core profit slipped 15% QoQ, dragged by the cleanroom segment but offset by the glove and technical rubber segments. Kossan remains a sector Top Pick for its solid balance sheet and above-peer margin profile.
  • Results overview. Kossan’s 1Q24 core net profit of MYR25m (-15% QoQ) accounted for 15% and 17% of our and consensus’ estimates. The sequential decline was attributed to lower volumes sold in the cleanroom segment, offset by an uptick in sales volumes in the glove and technical rubber divisions. Notwithstanding this, Kossan delivered a commendable core net margin of 7% (+6.8ppts QoQ), driven by better operating efficiency.
  • Margin. Opex was largely stable YoY at MYR429m but higher QoQ, tracking the escalation of raw material prices (natural latex, acrylonitrile, and natural gas tariffs were 23.7%, 0.7%, and 5% higher QoQ). That said, Kossan is the only glove maker that has never reported negative EBITDA (among the four major players), indicating robust operating leverage and cost discipline. We expect operating costs to remain stable in the remaining quarters of 2024.
  • Outlook. We expect sales volumes to pick up sequentially in view of a more balanced demand-supply dynamic by 2H24. We now expect ASPs to trend higher in 2Q24, given the higher raw material costs incurred in the previous quarters. Our upbeat industry outlook is premised on: i) Glove customers being more receptive to the cost pass-through; ii) Chinese players pivoting towards sustainability pricing; and iii) improving order visibility (April and May order volumes are picking up).
  • Earnings adjustment. We raise our 2024 and 2025 earnings estimates by 4% and 2%, taking into account the stronger sales volumes expected from 2Q24 onwards. Post earnings adjustment, our TP rises to MYR2.73, which implies 34x 2025F P/E, against its pre-pandemic 5-year historical mean of 20x. We incorporate a 5% ESG discount to our intrinsic value to derive our TP.
  • Key risks: i) Higher-than-expected sales volumes, ii) stronger-than expected USD against the MYR, and iii) lower-than-expected raw material prices.

Source: RHB Research - 23 May 2024

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