• Upgraded to HOLD (TP of RM2.03). Kossan’s 1HFY24 core PATAMI of RM62.9mn met our in-house expectation at 54.9% but was below street estimates at 43%. 2QFY24 revenue and PBT decline 4.8% QoQ and 5.9% QoQ respectively, no thanks to logistical challenges stemming from ongoing global shipping constraints. We make no changes on FY24-26F earnings assumption. Kossan is expected to sustain positive earnings growth due to higher sales volumes and consistent order replenishment. However, the broader rubber glove industry's recovery remains uncertain with structural issues like oversupply from Chinese manufacturers posing ongoing challenge. Due to the recent decline in share price, we upgraded Kossan to HOLD call from SELL with unchanged TP of RM2.03. Our valuation is based on Kossan’s 3-years average pre-Covid forward PE of 19x pegged to FY26F EPS of 10.7sen.

• Key Highlight. As for 2QFY24, decline in revenue and PBT were also impacted by lower sales volume as well as higher raw material cost and natural gas price. During this period, nitrile and latex prices soared 21% QoQ and 12% QoQ. Meanwhile, as for 1HFY24, revenue escalated 12.7% YoY while PBT turned to black to RM79.6mn.

• Earnings revision. Unchanged.

• Outlook. We anticipate Kossan will maintain positive earnings momentum supported by increased sales volumes. Although demand has not fully recovered to pre-COVID-19 levels, steady order replenishment should continue to underpin earnings growth. However, we remain concerned about the broader rubber glove industry's recovery to pre-COVID levels. Structural issues, particularly the oversupply resulting from massive production by Chinese manufacturers, continue to pose significant challenges.

Source: BIMB Securities Research - 23 Aug 2024