Review

• Kossan Rubber Industries Berhad’s (Kossan) 1H24 net profit of RM62.8mn (vs. net loss of RM27.6mn in 1H23) accounted for 33.2% of our full-year forecast and 43.0% of consensus estimates. We consider this to be within expectations as we expect stronger glove demand in 2H24.

• The turnaround in 1H24 is mainly driven by a revenue growth of 12.7% to RM881.5mn, supported by stronger operations across all 3 segments. The glove division PBT stood at RM48.6mn as compared with LBT of RM47.0mn in 1H23 mainly due to the higher sales volume and better operating efficiency.

• Meanwhile, Kossan’s TRP division PBT improved 17.8% to RM19.4mn, despite lower revenue of 4.9% to RM98.9mn due to better higher margin product mix. As for the clean-room division, PBT increased to RM4.9mn (vs. RM4.0mn in 1H23) in tandem with higher sales of 11.5% to RM50.0mn.

• 2Q24 PBT dipped 5.9% QoQ to RM38.6mn. We attribute the weaker performance to the glove division, whereby sales declined 7.0% to RM353.0mn due to the ongoing global shipment constraints. In addition, we note that raw material cost and natural gas price were higher in 2Q24.

Impact

• No change to our earnings estimates.

Outlook

• We believe that sales volume would improve in 2H24, driven by the higher gloves demand as customers replenish its inventory. Overall, we expect plant utilisation rate to improve to 65% in FY24 (vs. 50% in FY23). Note that Kossan currently have 129 glove production lines with an annual glove production capacity of 24.5bn pieces.

Valuation

• Following the recent weakness in its share price, we upgrade Kossan to Buy (previously hold) with a TP of RM2.38/share based on 1.5x CY25 P/B. In terms of asset quality, Kossan’s cash and investments stood at RM2.1bn as at Jun-24, equivalent to 39.7% of market cap.

Source: TA Research - 23 Aug 2024