ANALYSTS have generally trimmed Kossan Rubber Industries Bhd’s target price on the back of lingering industry-wide headwinds with average selling prices (ASPs) and margins remaining under pressure.
Despite its FY2021 core PATAMI (profit after tax and minority interests) coming inline, Hong Leong Investment Bank (HLIB) Research has lowered the glove maker’s earnings forecasts for FY2022-2023F by 43%-67% to account for lower ASP as well as higher operating costs.
For the record, Kossan’s PATAMI of RM2.86 bil (+161% year-on-year [yoy]) was within both HLIB Research and consensus estimates at 97% and 95% respectively,
“Consequently, our target price is lowered from RM2.65 to RM1.53, implying a valuation of 12.0 times PE (price-to-earnings ratio) on its FY22F EPS (earnings per share) of 12.7sen,” justified analyst Sophie Chua Siu Li in a results review.
Despite its quarterly core PATAMI for 4Q FY2021 ended Dec 31, 2021 of RM225 mil which marked a decline of 58% quarter-on-quarter (qoq) and 59%% yoy, Kossan has declared a fourth interim dividend of 12 sen/share (4Q FY2020: 11 sen; FY2021: 48 sen; FY2020: 14 sen).
“We expect industry-wide headwinds to continue to linger in the near-term as supply continues to outpace demand, leading to tighter competition within the industry,” projected HLIB Research.
“ASP is expected to continue falling as a result. Although raw material prices have been coming off gradually, given the inflationary pressure in other aspects (ie higher energy and labour costs), we expect margins to continue to normalise closer to pre-COVID levels.”
Meanwhile, CGS-CIMB Research expects Kossan to post a 90% yoy drop in net profit in FY2022 following an ASP decline (ie supply-led dynamics in the global glove sector), slower sales volume (ie lower spot orders and production restrictions from lockdowns) and rising capacity in the global glove sector (aggressive expansion plans).
“In our view, Kossan’s weak near-term outlook has been fully priced in at the current valuations,” opined analyst Walter Aw.
“The stock now trades at 14 times CY2023F P/E; a 25.7% discount to the glove sector’s CY2023F P/E of 19.4 times. Kossan also had a net cash position of RM2.4 bil of end-FY2021 which translates into 93.8 sen/share (54.4% of market cap).”
All-in-all, CGS-CIMB Research reiterated its “add” call on Kossan albeit with a lower target price of RM2.05 (from RM2.20 previously) as it believes that current valuations have more-than priced in the company’s weak near-term earnings outlook.
“It is also backed by its strong balance sheet market and position among top ten glove makers globally,” added the research house.
At 10.06am, Kossan was up 5 sen or 2.96% to RM1.74 with 2.9 million shares traded, thus valuing the company at RM4.44 bil. – Feb 18, 2022
