WHILE Kossan Rubber Industries Bhd was widely expected to underperform in its 1Q FY2021 ended March 31, 2021, the decline of its core earnings by a massive 91.3% year-on-year (yoy) to RM90.1 mil (1Q FY2021: 1.041 bil) in tandem with revenue that inched down by -68.5% yoy to RM690.6 mil has caught many analysts by surprise.
MIDF Research has attributed the poor performance in the current quarter to a decrease in average selling price (ASP) with the rate of decline in ASP faster than the decrease in raw material prices thereby lowering margins.
“Additionally, the performance in the quarter was also affected by logistic challenges caused by the global shipping container shortage,” justified the research house in a result review.
To reflect the latest performance, MIDF Research has revised downward Kossan’s target price to RM1.66 (from RM1.78 previously) (although it reiterated a “neutral” rating) after lowering the company’s earnings estimates for FY2022E by -13.2% in view of potential decline in ASP and Malaysia’s transition to the endemic stage.
“The group expects the supply and demand imbalance to persist in the near-term and the continued tapering of glove demand and ASP,” noted the research house.
Meanwhile, Kenanga Research retained its “underperform” rating on Kossan while lowering its target price to RM1.60 (from RM1.65 previously) in tandem with over-ordering over the past 15 months since the pandemic started as well as the very fact that the market is currently undergoing a phase of inventory adjustment.
In the meantime, Kossan’s planned capacity expansion over the next two years comprises a piece of land in Meru which is located adjacent to one of its current plants that has been earmarked for a single plant with 5 billion pieces capacity to be completed in two phases.
There will be six lines under Phase 1 (2 billion pieces) and 10 lines under Phase 2 (3 billion pieces) commencing in 1H 2022 (the Meru plant) and 12 lines with 4 billion pieces capacity to fully commission in 2H 2022 for its Bidor plant in Perak.
“Upon completion, these three new plants will bring the group’s total installed capacity from 32 billion to 42.4 billion (+33%) pieces of gloves per annum,” added Kenanga Research.
At 11.27am, Kossan was down 2sen or 1.09% to RM1.82 with 3.12 million shares traded, thus valuing the company at RM4.65 bil. – April 28, 2022
