Review

• Kossan’s 1H23 net losses of RM27.6mn (1H22: RM136.1mn profit) accounted for 52.0% of our full-year estimates. However, we deem the losses to be lower than our expectations as we expect profitable results moving forward.

• 2Q23 net losses narrowed to RM3.3mn from RM24.3mn loss in 1Q23 due the lower losses from the gloves division and higher profit from the Technical Rubber Products (TRP) and clean-room divisions. The gloves division LBT reduced to RM12.1mn as compared to LBT of RM34.9mn in 1Q23 on the back of better operating efficiency. ASP was relatively unchanged while volumes decreased by 3% QoQ. Overall, plant utilisation rates are at 40-45% levels.

• Kossan’s TRP and clean-room divisions cushioned the losses from the gloves division. TRP division recorded higher PBT of 8.4% to RM8.6mn due to higher margin products while clean-room division PBT increased by 49.3% to RM2.4mn in 2Q23.

• 1H23 LBT stood at RM16.5mn as compared with PBT of RM184.1mn in 1H22 due to the losses in the gloves division. We attribute the weaker gloves division performance to: i) lower ASP of 23%, ii) lower volumes of 31% and iii) higher energy and labour costs.

Impact

• We reduce FY23 net losses to RM13.2mn (previously RM53.0mn losses) after adjusting PBT margin by 2.2pp to reflect the better efficiency from the decommissioning of old plants and lowering our NBR raw material assumption by 20%.

Outlook

• We believe Kosan’s glove division will turnaround in 2H23 driven by the lower NBR raw materials (from USD0.89/kg in May to USD0.70/kg in July 2023) and better operating efficiency. The group will further close down 6bn capacity in 2023, bringing end-2023 capacity to 24.5bn gloves from 33.5bn pieces in 2021.

Valuation

• Reiterate our Buy recommendation on Kossan with an unchanged target price of RM1.60/share based on 1.0x CY24 PB.

Source: TA Research - 28 Jul 2023