KOSSAN's 9MFY24 results beat expectations. We expect a strong showing in 4QCY24 and moving into FY25, boosted by the recently announced US tariffs on Chinese glove makers. Due to the better-than- expected result, we raise our FY24F/FY25F/FY26F net profit by 4%/20%/9%. Our TP is raise to RM3.00 (previously RM2.60). Reiterate OUTPERFORM.

Its 9MFY24 net profit of RM92m beat expectations at 76% of both our and consensus full-year net profit forecasts. We consider the result as above our expectation in anticipation of a strong 4QCY24 to be boosted by demand from the US. A 1st interim and special dividend of 2.0 and 6.0 sen were declared, respectively, which came in above our expectation.

While a special dividend was not guided, we were not surprised and see this as once-off given the imposition of a 2% dividend tax (on chargeable dividend income above RM100,000 received) that will be applicable from FY25.

YoY, its 9MFY24 revenue rose 17% largely due to higher sales volume, partially offset by a slightly lower ASP, we believe. It returned to the black at the net level from a loss a year ago in the absence of high-cost inventory (which weighed on its performance then).

QoQ, its 3QFY24 revenue rose 18% due to a higher sales volume (>10%) which more than offset lower ASP, we believe. The delay in shipments due to logistic challenges caused by the ongoing global shipment constraints in previous quarter was booked in 3QFY24. Its net profit came in 6% lower to RM29m due to a higher effective tax rate of 24% compared to 17% in 2QFY24.

Outlook. Amplifying the optimism are: (i) indications pointing towards strong demand recovery moving into 2HCY24 and CY25, underpinned by inventory rebuilding from distributors and faster-than-expected industry consolidation, (ii) tell-tale signs that predatory pricing by certain overseas players (i.e. selling below cost over an extended period to eliminate competitors) have diminished, and (iii) US imposition of tariff ratcheting up to 50% and 100% in CY25 and CY26, respectively, (revised up as announced on 13 Sept) making Malaysian glove makers the prime beneficiary. We expect glove stock prices to re-rate in anticipation of near-term earnings upsurge which clearly is a positive for the sector. We now expect the oversupply situation to be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective plants and exit of new entrants. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 when there is no more net new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.

Valuations. We raise our net profit by 4%/20%/9% for FY24F/FY25F/FY26F by raising our utilisation rate from 55%/59%/65% to 62%/75%/77%, respectively. Due to its more disciplined cost structure and continuous efforts to streamline operations, we raised our TP from RM2.60 to RM3.00 based on 2x FY25F BVPS (previously 1.7x), which is at the sector's early up-cycle phase of between 2x to 4x, i.e. the levels seen emerging from an up-cycle in 2012 and at a discount that we believe is valid due to the emergence of Chinese glove makers. At RM3.00, the stock implied PER is at 35x or 2.0SD above its pre-Covid 5-year historical 1-year forward average. Additionally, in terms of PBV, the stock is trading below -2.0SD pre-COVID 5-year historical average 1-year forward of 2.5x.

We don't consider this PER to be aggressive as if we have given full measure of benefit to any increase in ASP to earnings, we expect PER would be at a more palatable level (at 25-30x), at 1.0SD above pre-Covid historical 1-year forward average for KOSSAN. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). Reiterate OUTPERFORM.

Key risks to our recommendation include: (i) certain Chinese glove giants ramp up predatory pricing practices (i.e. selling below cost over an extended period of time to eliminate competitors), (ii) weaker-than-expected growth in demand for gloves due to slower-than-anticipated hygiene standards implementation and health awareness globally, and (iii) unfavourable changes in tariffs to Malaysian glove makers.

Source: Kenanga Research - 18 Nov 2024