MAYBANK IB Research has demoted Kossan Rubber Industries Bhd to “sell” (from “hold” previously) with a lower target price of RM1.10 (from RM1.85 previously) on concerns over the Big-Four glove maker having to endure prolonged demand-supply disequilibrium and inevitable price war.
Moreover, with both its average selling price (ASP) and earnings outlook remain challenging, Kossan may slow down its capacity expansion plans in tandem with market condition, according to Maybank IB Research.
“Fortunately, Kossan has a strong balance sheet (57 sen/share net cash; 0.5 times total cash/market cap ratio) to ride out the storm,” opined analyst Wong Wei Sum in a company update.
“Given the oversupply situation, we lower our utilisation rate assumption to 70% (from 75% previously) while keeping our ASP assumption of US$23/1,000 pieces (similar to pre-pandemic level) for 2023/2024 for now.”
Consequently, Maybank IB Research also reduced its FY2023/FY2024 earnings forecasts for Kossan by -28%/-42%.
The research house further observed that recent results of major glove makers underlined the challenges faced by Malaysian glove makers.
“Despite pick-up in orders and stabilising ASP (in view of rising raw material prices), margin contraction is to continue as glove makers have been unable to fully pass-on the higher production costs (raw materials, manpower and electricity) to customers due to stiff competition,” cautioned Maybank IB Research.
“As a result, we expect Kossan’s upcoming 2Q FY2022 results (April-June 2022 period) which will be released on July 26 to be weaker quarter-on-quarter (qoq) on higher operating costs.”
Thankfully, the research house said Kossan’s strong balance sheet has cushioned the adverse effect of price war.
As of March 2022, Kossan’s net cash stood at RM1.5 bil (57 sen/share) while total its cash of RM1.7 bil accounted for 50% of its market capitalisation of RM3.3 bil.
“We believe the strong balance sheet will allow Kossan to weather through the downturn and provide some financial cushion to the price war and self-fund its capacity expansions for the next few years,” reckoned Maybank IB Research. “Kossan intends to raise its capacity to 38.5 billion pieces in 2023 (2022: 33.5 billion pieces).”
At the close of today’s mid-day trading, Kossan was down 2 sen or 1.54% to RM1.28 with 1.67 million shares traded, thus valuing the company at RM3.27 bil. – July 4, 2022
