KENANGA Research has further lowered Kossan Rubber Industries Bhd’s target price to RM1.03 (from RM1.33 previously) while reiterating its “underperform” rating in anticipation of softer average selling price (ASP) and lower-than-expected margins in subsequent quarters.
Yesterday (July 26), the Big-Four glove maker posted a 93.6% year-on-year drop in its net profit for 1H FY2022 to RM136.1 mil (1H FY2021: RM2.11 bil) on the back of a 71.1% decline in revenue to RM1.28 bil (1H FY2021: RM4.43 bil).
On a quarter-on-quarter (qoq) basis, Kossan’s 2Q FY2022 revenue and net profit declined by 14.6% and 45.7% respectively owing to (i) lower sales volume (-1.0% qoq); (ii) lower ASPs (-10% to -15% qoq); and (iii) weaker economies of scale. N
“We expect ASP to remain in the doldrums in 2H 2022,” projected analyst Raymond Choo Ping Khoon in a company results review.
“As a result of massive capacity expansion by incumbent players as well as new players influx during the pandemic years – enticed by the then super fat margins that had eventually evaporated – we estimate that the global glove manufacturing capacity has jumped by 22% to 511 billion pieces in 2022.”
On the other hand, as more countries come out the other end of the pandemic, Kenanga Research expects the global demand for gloves to ease by 10% in 2022 to 387 billion pieces (which is partly also due to the de-stocking activities along the distribution network).
This will result in an excess supply of 124 billion pieces (assuming capacity utilisation is maximised).
“In 2023, we estimate that the global glove manufacturing capacity will surge by another 16% to 595 billion pieces (as more capacity planned during the pandemic years finally comes on-line) while the global demand for gloves shall resume its organic growth of 15% annually,” opined Kenanga Research.
“This will result in the excess supply rising further to 150 billion pieces.”
Based on the research house’s estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming on-stream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.
Meanwhile, CGS-CIMB Research downgraded Kossan to “hold” from “add” with lower target price of RM1.38 (from RM2.05 previously) to account for weaker ASPs and slower demand.
“While earnings could be weaker in 2H 2022 (further potential downside risk to earnings if ASPs fall below US$21 per 1,000 glove pieces), we believe the downside risks could be offset by its strong net cash position of RM2.2 bil (87.3 sen/share) and long-term inelastic demand of rubber gloves globally,” justified analyst Walter Aw.
At 9.32am, Kossan was down 1 sen to RM1.32 with 1.44 million shares traded, thus valuing the company at RM3.38 bil. – July 27, 2022
