Review

• Kossan’s 9M23 net profit of RM13.4mn beat ours and consensus expectations. Previously, we forecasted a loss of RM13.2mn for FY23. The earnings surprise came from better-than-expected margins as NBR raw materials weakened.

• The group turnaround in 3Q23 with a net profit of RM41.0mn (vs. net loss of RM3.3mn and RM24.3mn in 2Q23 and 1Q23 respectively). The commendable performance was mainly driven by the gloves division, posting a PBT of RM31.2mn as compared to a LBT of RM12.1mn in 2Q23. The PBT margin was boosted (+13.5pp QoQ) by improved cost optimisation, lower raw material and natural gas costs. Meanwhile, the gloves division revenue rose to RM321.2mn (+1.7% QoQ) due to higher sales volumes of circa-8%, mitigating the lower ASP of 3%. Overall, 3Q23 plant utilisation rates were at 42-48% levels.

• QoQ, Kossan’s TRP and clean-room divisions improved as well. The TRP division recorded higher PBT of RM11.0mn, up 27.9%, due to increased sales of high-margin products while the clean-room division PBT increased by 18.4% to RM2.8mn in 3Q23.

• 9M23 PBT stood at RM32.4mn (vs. PBT of RM211.9mn in 9M22). The weaker performance was attributed to: i) 22% decline in ASP, ii) 25% decline in volumes, and iii) higher energy and labour costs.

Impact

• We raise our FY23/24/25 earnings forecasts to RM66.7/189.3/206.7mn (previously RM-13.2/126.9/137.8mn) after lowering our NBR raw material assumption by 21%.

Outlook

• Moving into 4Q23, we expect Kossan’s performance to improve further, aided by increase operational efficiency amid higher sales volumes as customers are expected to replenish inventories. Note that the group has reduced 9bn capacity since 2021 to about 24.5bn currently.

Valuation

• Maintain our Buy recommendation on the stock with a higher TP of RM1.75/share (previously RM1.60) based on 1.1x CY24 PB.

Source: TA Research - 16 Nov 2023