MAYBANK IB Research has reiterated its “sell” rating on Kossan Rubber Industries Bhd with a lower target price of RM1.03 (from RM1.10 previously) given the cautious outlook of a challenging industry over the next one year due to stiff competition in an over-supplied market amid higher energy and labour costs.
Recall that the glove maker’s 3Q FY2022 net profit plunged 96% year-on-year (yoy) to RM23.26 mil (3Q FY2021: RM528.2 mil; down 49% quarter or quarter [qoq]) which took its 9M FY2022 net profit to RM159.4m (-94% yoy).
“4Q FY2022’s earnings are likely to be weaker again due to lower utilisation rate of 40%-50% (versus the research house’s 60%) on intense competition,” projected analyst Wong Wei Sum in a results review.
“The yoy and qoq fall in 3Q FY2022 earnings were mainly due to declining glove ASPs (average selling prices) and sales volume on rising competition as well as increasing energy and labour costs.”
In terms of quarterly earnings, CGS-CIMB Research expects Kossan’s forthcoming 4Q FY2022F results to be its worst for the year.
“We believe that Kossan’s ASPs would only stabilise in 4Q 2022F at US$21-US$22 per 1,000 pieces vs US$23 in 3Q FY2022 (our estimate),” opined analyst Walter Aw.
“Beyond 4Q FY2022F, we expect Kossan to continue to face a weak operating environment; we project net profit to decline 33% in FY2023F as we expect glove demand will take a longer period (at least one year) to show significant recovery while cost pressure remains (from labour and natural gas, among others).”
All-in-all, CGS-CIMB Research cut Kossan’s FY2022-FY2024F earnings per share (EPS) to account for lower sales volumes and ASPs due to weak demand. In tandem with its EPS cuts, the glovemaker’s target price declines to RM1.15 (from RM1.38 previously).
“Our ‘hold’ call remains. While earnings could continue to be weak in 4Q FY2022F (further potential downside risk to earnings if ASPs fall below US$21 per 1,000 pieces), we believe the downside risks will be supported its (Kossan’s) strong net cash position (63.3% of market cap) and the long-term inelastic demand of rubber gloves.”
At 12.12pm, Kossan was down 10 sen or 8.33% to RM1.10 with 6.94 million shares traded, thus valuing the company at RM2.81 bil. – Nov 3, 2022
