KOSSAN Rubber Industries Bhd will have to brace for a capped upside moving forward as the average selling price (ASP) downtrend continues.
AmResearch expects this to continue till 4Q 2021 before ending in early 2022.
Having said that, the downside is also limited as its share price has fallen to below pre-pandemic level of RM2.45 which was last recorded on Jan 31, 2020.
“At that time, COVID-19 has not spread to Malaysia and global daily cases were still low at less than 2,000 cases. Back then, the ASP had not started its surge,” recalled analyst Alan Lim Seong Chun in a results review.
“As Kossan’s capacity has expanded with a much stronger balance sheet, we believe that our valuation of RM2.45 is fair as its fundamentals remain intact.”
According to AmResearch, Kossan’s 9M FY2021 net profit of RM2.63 bil was in line with its expectations.
Although it made up 84% and 81% of consensus and the research house’s FY2021 earnings estimates respectively, AmResearch expects a weaker 4Q FY2021 due to declining ASP trend.
However, the Big-Four glove maker’s 3Q FY2021 earnings tumbled 55% quarter-on-quarter (qoq) to RM496 mil.
The significant drop in earnings was due to lower ASP by 15%-20%.
Meanwhile, the volume of gloves sold shrank 25%–30% due to the implementation of the enhanced movement control order (MCO) in Selangor which was followed by the National Recovery Plan (NRP).
All in all, AmResearch maintained its “hold” call on Kossan with a lower fair value of RM2.55 (from RM3.06 previously) following reduction of earnings estimates for FY2022–FY2023 after lowering its ASP for gloves.
Meanwhile, CGA-CIMB Research is still bullish on Kossan although it expects the company to continue recording weaker qoq results in FY2022F/2023F on the back of declining ASPs and lower sales volume.
“In tandem with our earnings per share (EPS) cuts, our target price is reduced to RM3 (from RM4 previously) still pegged to CY2023F P/E (price-to-earnings ratio) of 16 times (in line with its five-year mean P/E),” justified analyst Walter Aw.
“We keep our ‘add’ call on Kossan in view of (i) its attractive valuations (it is trading at a 17.8% discount to its five-year mean of 16x); (ii) its strong balance sheet (net cash of RM2.5 bil as of end-9M FY2021, and equivalent of 43% of its current market cap); and (iii) the inelastic global demand for gloves in the long run.”
On a more bearish front, Maybank IB Research maintained its “sell” rating on Kossan with a slightly lower target price of RM1.87 (from RM1.86 previously).
This is despite the research house having raised Kossan’s FY2021 earnings forecasts by +6.3% to factor in lower latex (-8%) and nitrile latex (-17%) assumptions while keeping its FY2022/2023 earnings forecasts largely unchanged (+0.3%/+0.4%).
“Our forecasts are based on FY2021/2022/2023 blended ASP assumptions of US$71/US$26/US$23 per 1,000 glove pieces,” projected analyst Wong Wei Sum.
“Kossan’s balance sheet remained strong as of end-September with net cash of RM2.4 bil (94 sen/share net cash).
“The strong balance sheet should be able to self-fund its capacity expansions for the next few years.”
At 11.08am, Kossan was up 8 sen or 3.28% to RM2.52 with 2.75 million shares traded, this valuing the company at RM6.43 bil. – Oct 22, 2021
