KOSSAN’s 1HFY24 results met our expectation but came in below consensus estimate. It returned to the black in 1HFY24 from a year ago in the absence of high-cost inventory, although QoQ sales volumes weakened in 2QFY24 as we believe ASPs improved slightly. Massive overcapacity continued to weigh on the sector’s outlook. We maintain our earnings forecasts and UNDERPERFORM call but raise our TP to RM1.56 (previously RM1.48).

Its 1HFY24 net profit of RM62.8m met our expectation at 52% of our full-year forecast. However, it came in below consensus full-year net profit forecast at only 43% of full-year forecast. No dividend was declared which came in within our expectation.

YoY, its 1HFY24 revenue rose 13% largely due to higher sales volume, partially offset by, we believe, a slight improvement in ASP. It returned to the black at the net level from a loss a year ago in the absence of high-cost inventory (which weighed on its performance a year ago).

QoQ, its 2QFY24 revenue fell 5% due to a lower sales volume, no thanks to the logistic challenges caused by the ongoing global shipment constraints. However, its net profit came in flat at RM31m.

Outlook. KOSSAN guided for the challenging operating environment to persist throughout FY24 as players continue to grapple with massive overcapacity, subdued ASPs and high input cost.

Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum, underpinned by rising hygiene awareness. MARGMA projects 12%−15% growth in the global demand for rubber gloves annually from CY23, following an estimated 25% contraction to 300b pieces in CY23. We project the demand for gloves to rise by 30% in CY24 to 390b pieces (due to a low base effect in CY23) and resume its organic growth of 15% thereafter. This will result in an excess capacity of 212b pieces in CY24. The overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry in CY24.

Forecasts. Maintained.

Valuations. However, we raise our TP by 5% to RM1.56 to reflect the removal of a 5% ESG discount as we now rate KOSSAN’s ESG rating at 3-star (vs. 2-star previously) following the better-than-expected effort to track and reduce carbon emission within their supply chain (see Page 4). Our TP is based on 1.0x FY24F BVPS, at 40% discount to the sector’s average of 1.7x charted during previous downturns in 2008−2011 and 2014−2015. At 50x forward PER and forward ROE of 3%, its valuations are lofty despite the improved outlook. Reiterate UNDERPERFORM.

Key risks to our recommendation are: (i) certain Chinese glove giants stop their predatory pricing strategy (i.e. selling below cost over an extended period of time to eliminate competitors), leading to a strong earnings rebound for the sector, (ii) stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (iii) industry consolidation reducing competition among players, and (iv) epidemic and pandemic occurrences.

Source: Kenanga Research - 23 Aug 2024