• Keep BUY, new MYR2.55 TP (DCF) from MYR2.73, 25% upside. Kossan Rubber delivered a 2Q24 core profit of MYR26.8m (+7% QoQ), bringing its 6M24 numbers to MYR52m, ie 30% and 35% of our and consensus’ estimates. The below expectation results were primarily on global supply chain disruptions. We expect it to deliver stronger 2H24 earnings in view of improving customers’ acceptance levels towards ASP hikes, greater demand visibility, and stabilisation of raw material prices. Our TP incorporates a 5% ESG discount as its 2.8 ESG score is below the 3.0 country median.

• Results overview. 2Q24 core net profit grew 7% QoQ to MYR26.8m due to a better product mix. During this period, Kossan’s nitrile gloves division suffered a 7% QoQ revenue decline. This was offset by a robust performance from the cleanroom division. YoY, the group saw significant turnarounds from a net loss of MYR14m – thanks to higher sales volumes and improving operating efficiencies.

• Margins. PBT margin from the technical rubber division improved 2.9ppts QoQ – offset against 0.7ppts and 1.4ppts contractions from the gloves and cleanroom divisions (likely due to higher raw material costs and natural gas prices). At group level, Kossan’s core net margin edged up 0.3ppts QoQ thanks to the better product mix from the technical rubber division despite higher raw material and natural gas prices. Moving forward, we expect margins to improve in 2H24 on nitrile and natural gas price normalisations, ie QTD (as at 22 Aug), nitrile and gas prices have dropped 3.7% and 7.5% QoQ.

• Outlook. Looking ahead, we expect sales volumes to pick up sequentially in view of a more balanced demand-supply dynamic by 2H24. This is predicated by the industry demand-supply dynamic, which is on the verge of achieving equilibrium, as well as encouraging signs of recovery on: i) The inventory destocking cycle coming to an end, ii) improving order visibility, and iii) customers becoming more receptive of price hikes.

• Earnings adjustment. We lower our FY24F-26F earnings by 12%, 13%, and 12% after taking into account a weakening USD outlook and lowering our volume assumptions as a result of potential shipment delays caused by the global logistics disruptions. Nonetheless, we expect the quantum of ASP hikes in 3Q24 to be more than enough to offset the impact of a weakening USD. Post the earnings adjustment, our TP is now at MYR2.55, which implies 36x 2025F P/E against Kossan’s 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 - 23 Aug 2024