WHILE the outlook for glove makers seemed to be gradually improving, they are not entirely out of the woods yet given persisting inflationary cost pressures.
No doubt the ability to raise prices will slightly ease off some margin pressure, Hong Leong Investment Bank (HLIB) Research is of the view that it will remain challenging for the manufacturers to entirely pass on the cost increase considering the massive supply of glove stock in the market.
Zooming in on Kossan Rubber Industries Bhd, the research house said the Big-Four glove maker anticipates glove prices to bottom out in 2Q 2022 and begin to rebound in 2H 2022, supported by cost inflation.
“Also, utilisation rate could potentially recover to 75-80% in 2H 2022 (from 70% currently) following the completion of inventory drawdown activities by glove buyers,” projected analyst Sophie Chua Siu Li in a company update.
“We keep our FY2022F earnings forecast largely unchanged but we raise our FY2023-FY2024F forecasts by 12-14% as we factor in the positives into our projections.”
Rolling over its valuation base year to FY2023F, HLIB Research upgraded Kossan to “hold” (from “sell” previously) while raising its target price to RM1.97 (from RM1.53 previously).
According to the research house, Kossan’s average selling prices (ASPs) in 1Q 2022 averaged around US$30 per 1,000 pieces of gloves. Moving into 2Q 20, the glove maker is still expecting a slight decline in ASP but anticipates glove prices to rebound in 2H 2022.
“The rebound in ASPs is supported by an increase in costs (note that there will usually be a 2-3 months’ time lag in passing on cost increase) due to higher energy, packaging and labour costs,” HLIB Research pointed out.
“Based on our channel checks, the glove buyers’ inventory levels have normalised to circa two months now.”
While normal dividends will still be paid out (dividend policy of 30% to be paid bi-annually), the research house was made to understand that Kossan does not intend to declare special dividends with its existing cash pile but will retain the cash for re-investment and future expansion.
As of 1Q FY2022, Kossan is sitting on a cash pile of RM2.55 bil comprising RM1.68 bil cash and RM878 mil money market investments.
“The group will be focusing on full automation to reduce its reliance on general workers, while at the same time pursuing full digitalisation to drive sustainability in its business,” added HLIB Research.
At 11.26am, Kossan was down 1 sen or 0.54% to RM1.85 with 498,300 shares traded, thus valuing the company at RM4.73 bil. – May 10, 2022
