• Still BUY, higher MYR2.40 TP (DCF) from MYR2.20. Kossan Rubber is expected to report its 1Q24 results in May. We expect the company to register a core profit of between MYR30m and MYR35m, representing a flattish to +16% QoQ growth on improving operating dynamics. Our call is premised on a meaningful improvement in market dynamics (by 2H24) and Kossan’s consistent dividend payout practices. Our TP incorporates a new 5% ESG discount based on its 2.8 ESG score vis-à-vis the 3.0 country median.

• Results preview. We expect Kossan to deliver a core profit of between MYR30m and MYR35m in 1Q24, representing a flattish to +16% QoQ growth on the back of improving operating dynamics, ie cost pass-through mechanism beginning to take place, no recent flare-ups from the Red Sea crisis, improving Malaysia glove exports value, and subsiding competition risks from Chinese manufacturers. That said, we expect a risk of margins compression arising from higher operating costs, ie higher gas tariff review (+4-5% in 1Q24), and cost escalations of natural rubber and acrylonitrile prices (+24% and +0.7% QoQ). This was offset by the strengthening of the USD against the MYR (+0.5%). We expect Kossan continue its dividend payouts in FY24 (with a 30% payout under our assumption).

• Industry dynamics turning favourable. We noticed recent operating dynamics have turned in favour of the glove manufacturers, as we understand that customers are more receptive to ASP increases in the coming months. We believe more meaningful price hikes are likely to take place in April and May. Conversely, Chinese glove makers are expected to raise ASPs to USD16-17 per 1,000 pieces from USD15-16 previously for the coming months based to our channel checks. On the demand side, Malaysia’s 1Q24 glove exports value surged 5% YoY (+10% QoQ), surpassing export volume growth (flattish YoY, 6% QoQ). This indicates the cost pass-through mechanism’s momentum is picking up.

• Earnings adjustment. Following a housekeeping exercise, our 2024F and 2025F earnings are raised by 4% each after incorporating figures from Kossan’s latest annual report. We also take this opportunity to revise its ESG score to 2.8 from 2.6 after the company demonstrated a reduction in CO2 emission intensity, primarily due to higher renewable energy consumption (ie solar) recorded during the year. Post adjustment, our TP is now higher at MYR2.40 and implies 30x 2025F P/E against its pre-COVID-19 5-year historical mean of 20x.

• Key risks: i) Lower-than-expected sales volumes, ii) a weaker-than expected USD against the MYR, and iii) higher-than-expected raw material prices.

Source: RHB Research - 30 Apr 2024