KEY INVESTMENT HIGHLIGHTS

• Maintain NEUTRAL with a revised target price of RM2.14 post the 3QFY24 results announcement
• 3QFY24 normalised earnings grew at a slower pace in view of the rising raw material costs
• Nonetheless, cumulative 9MFY24 normalised earnings came in at RM77.0m which is at the lower end of our expectation
• Immediate share price performance will be supported by special dividend of 6sen per share

Near-term profit margin squeeze. We are maintaining our NEUTRAL recommendation on Kossan with a revised target price of RM 2.14 (previously RM1.89) post the group's 3QFY24 results announcement. The group's profitability in 3QFY24 was impacted by the increase in raw material cost despite recording better revenue. We expect the profit margin to gradually improve in view of the continuous recovery in demand as well as ongoing improvement in production efficiencies.

Nonetheless, we expect the share price performance would be supported by the special dividend of 6sen per share which came in a surprise.

Weak 3QFY24 earnings. 3FY24 normalised earnings came in at RM25.0m, a decline of -27.0%yoy and -8.4%qoq. This was despite Kossan recording higher revenue of RM507.4m. The discrepancy was mainly led higher raw material cost across all divisions.

Largely within expectation. On a cumulative basis, 9MFY24 normalised earnings amounted to RM77.0m, a reversal from a loss of - RM3.1m. This was mainly supported by +17.1%yoy recovery in revenue to RM1.4b as well as improvement in production efficiencies.

All in, Kossan's 9MFY24 financial performance came in at the lower end of our expectation, making up 70.4% of our full year FY24 earnings estimates. Comparatively, it was below consensus expectations at 59.6% of full year earnings estimates.

Special dividend declared. The group announced interim dividend of 2sen per share. In addition, it also announced a special dividend of 6sen per share. This adds up to 8sen dividend announced in 3QFY24.

Earnings revision. We retain our earnings estimates for FY24. We only adjust our dividend estimates higher to account for the special dividend.

Meanwhile, FY25 and FY26 earnings estimates has been revised up by +13.3% and +7.7% respectively as we assume higher demand for its products, primarily for the glove division.

Higher target price. Following our earnings upgrade, our target price has been revised upwards to RM2.14 from 1.89 previously. Note that we retained our target PER of 39.4x.

Source: MIDF Research - 18 Nov 2024