• Kossan’s 9M24 core net profit jumped 9.8-fold to RM89m reflecting the better operating environment

• We deem the results to be broadly in line with our expectations, with the US$ stabilizing, stronger sales volumes, and ASP to underpin earnings momentum

• Maintain BUY rating and 12-months TP of RM2.60

Results within expectations

Kossan's 9M24 core net profit of RM89m (9M23: RM9m) is broadly in line with our expectations, but missed consensus, accounting for 67%/61% of both respective forecasts. 9M24 revenue increased 17% YoY to RM1.4bn, as sales volume and ASP improved on stronger demand. We estimate Kossan to be operating at a higher 75–80% utilization, compared to 45–50% of its rated capacity of 30.5bn pieces per annum in 3Q23. The EBITDA margin grew 5ppts to 12% due to better operational leverage. Kossan declared a total of 8sen dividend, including a special dividend of 6sen, leading us to adjust our 2024E DPS assumption higher to 10.4sen (from 2.1sen).

Stronger earnings growth in 4Q24

Sequential 3Q24 revenue rose 18% to RM507m attributed to higher sales volume recognised, due to carryover of delayed shipments. We estimate sales volume at c.5.7bn pieces (+26% QoQ), with a marginal 2% increase in ASP at US$20-21/k pieces. Despite stronger revenue, 3Q24 core net profit declined 16% QoQ, largely impacted by higher raw material costs (+6%) and unfavourable forex, which led to 2ppts contraction in EBITDA margin to 11%. We estimate that sales volume for 4Q24 will see a 5–10% QoQ increase, with room for a further ASP hike (+3%), and the recent strengthening of US$ expected to drive stronger sequential earnings momentum, in line with expectations from other local glovemakers.

Maintain BUY and RM2.60 target price

We maintain our BUY rating and 12-months TP of RM2.60, based on target 23x PE multiple on 2025E EPS. We believe the Malaysia rubber glove sector is in a better position to benefit from the increased US tariff on Chinese glovemakers, driving a more sustainable earnings recovery. Kossan’s balance sheet remains strong with RM1.8bn in net cash, providing leeway to declare for more special dividends, which could surprise on the upside. Key risks to our call include 1) the resumption of China glovemaker’s capacity, 2) weaker-than-expected sales volume and ASP recovery, and 3) rising raw material and natural gas prices.

Source: Philip Capital Research - 18 Nov 2024