• Maintain BUY, with new DCF-derived TP of MYR2.51 from MYR2.55, 32% upside. Kossan Rubber is poised to benefit from the potential trade diversion with the latest revision of higher import tariff on China glove makers. Execution remains crucial as the recent weakening USD should be a key hindrance among investors. We continue to like KRI – still a sector Top Pick – given its solid balance sheet and above-peer margin profile. Our TP incorporates a 4% discount, as KRI’s ESG score is 2.8.

• Industry dynamics remain favourable. We learnt that the industry operating dynamics have turned favourable for gloves manufacturers as customers are more receptive to the ASP increase. That said, industry blended ASP is set to improve further to USD21-22/1000 pieces (pcs) by 4QCY24 as Malaysian glove makers are in the discussion stage to raise prices to translate the effect of the weakening USD to customers. Meanwhile, China glove makers’ ASPs now range at USD18-19/1,000 pcs from USD17-18 in the previous quarter. In terms of demand, Malaysia’s gloves export volume surged 66% MoM and 105% YoY in August, outpacing the growth in July (+12% MoM; +43% YoY). The latest export volume is even 34% higher compared to the pre-pandemic’s 2-year monthly average number, indicating that the recovery momentum of global gloves demand remains healthy.

• US tariff on China. To recap, The Office of the United States Trade Representative (USTR) announced the final modifications concerning the statutory review of tariff actions on China, entailing a new set tariff rate on medical/surgical gloves, which will be revised to 50% and 100% (effective 2025 and 2026) from 25% effective 2026 as proposed in May. We expect KRI to benefit from the potential trade diversion with estimated net earnings accretion of 6-6% in FY25-26 based on our estimate.

• Earnings revision and valuation. We lower our FY24F-26F earnings by 12%, 33% and 20% largely reflecting the impact of the weakening USD against the MYR. Our USD/MYR assumptions for FY24-26 are lowered to 4.50, 4.00 and 4.10 from 4.65, 4.45 and 4.40. For every 5% change in USD/MYR, the impact to KRI’s FY25F-26F net earnings is estimated at 22% and 17%. Nonetheless, we believe the impact could be mitigated by gloves manufacturers raising ASP given the weakening USD (as most of them are already in the discussion stage with customers to raise prices by at least USD1). KRI’s valuation remains compelling, trading at +0.5SD from its 2-year historical mean. Post earnings adjustment, we derived new a TP of MYR2.51 representing 1.6x 2025F P/BV, or +2SD from its 2-year historical mean. Key risks: Decrease in gloves ASP, slower-than-expected capacity expansion, lower-than-expected utilisation rate, and higher-than-expected raw material prices.

Source: RHB Research - 7 Oct 2024