EVEN as it trims the target price of Kossan Rubber Industries Bhd by a whisker to RM1.20 (from RM1.24 previously) in view of weak average selling prices (ASP), TA Securities Research continues to reiterate its “buy” call on the Big-Four glove maker on grounds of its resilient balance sheet.
The research house expects the glove industry to remain challenging in 2H 2022 – a trend that may continue till end-2023 – due to the current oversupply/overstocking situation, subsequent inventory adjustments by customers as well as intensifying competition from China manufacturers.
“Based on our channel checks, we gather that the ASP of Malaysia’s gloves is US$19-US$20 per 1,000 glove pieces currently which is higher than the ASP in China of about US$14-US$15/1,000 pieces,” revealed analyst Tan Kong Jin in a company update.
“As such, we believe Malaysia’s glove ASP will remain weak over the near term as China is expected to secure more market share.”
TA Securities Research further projected Kossan’s 2H 2022 utilisation rates to hover at 40%-50% (vs 2Q 2022’s 60%) on the back of weaker demand and competitive pricing from China’s glove players.
“In our forecasts, we expect Kossan’s 2H 2022 profit to decline to RM50 mil-RM60 mil from a profit of RM136.1 mil in 1H 2022,” opined the research house.
“On the whole, we expect Kossan to post a profit of RM191.6 mil in FY2022 vs RM2.9 bil in FY2021. Thereafter, we expect its FY2023 earnings to decline 35.7% to RM123.3 mil, mainly due to the oversupply situation and strong base in 1H 2022.”
On the bright side, TA Securities Research is impressed with Kossan’s financial strength as per its robust balance sheet. As of 2Q 2022, the group’s cash and bank balances stood at RM2.2 bil, equivalent to 79.2% of its market cap while its cash per share is at 87 sen/share.
“As for the dividend, we believe the group will continue to pay a dividend payout of circa 40%, representing a dividend yield of 2.7% for FY2022,” projected the research house.
Given the current oversupply situation, Kossan has placed its near-term expansion plans on hold. As it is, Kossan’s current capacity stood at 33.5 billion pieces of gloves per annum.
“Note that previously, Phase 1 of Kossan’s Plant 21 (2 billion pieces or six lines) and Phase 2 (3 billion or 10 lines) were targeted for completion by end-2023,” added TA Securities Research.
At 10.50am, Kossan was up 3 sen or 2.73% to RM1.13 with 1.71 million shares traded, thus valuing the company at RM2.89 bil. – Oct 13, 2022