• Maintain BUY, with new DCF-derived MYR2.60 TP from MYR2.51, 14% upside. Kossan Rubber’s 3Q24 core net profit was MYR21.7m, bringing its 9M24 number to MYR73.6m –54%and 58% of our and consensus’ estimates. Results were below expectations primarily due to unfavourable FX and higher raw material cost. We expect it to deliver stronger 4Q24 earnings on the back of steep ASP revision (from late October onwards) and improving operating dyanmics. Our TP incorporates a 4% ESG discount.

• Results overview. KRI’s 3Q24 core net profit fell 19% QoQ to MYR21.7m, mainly dragged by unfavourable FX. Revenue surged 18% QoQ to MYR507.4m as all its three divisions reported sequentially higher revenue (technical rubber: +24%, gloves: +17%, cleanroom: +25%) on top of recognising partial revenue as a result of delayed shipments from the prior quarter. The group declared an interim dividend and special dividend of 2 sen and 8 sen.

• Margin. PBT margin from the technical rubber division contracted 12ppts QoQ, likely due to higher raw material cost. Meanwhile, its gloves division’s PBT margin grew 1ppt QoQ, likely driven by better product mix and improving operating efficiency. Moving forward, we expect margin to improve in 4Q24 on the back of the normalisation of nitrile prices (QTD as at Nov 2024: -2%).

• Outlook. Looking ahead, industry blended ASP is set to increase by at least USD1-2/1,000 pcs by 4Q24 as Malaysian glove makers are set to raise prices to translate the effect of the weakening USD to customers. Demand growth momentum should remain healthy as suggested by Department of Statistics Malaysia’s export data (with 3Q24 glove exports at +20% following an 8% growth in 2Q24). This,together with the favourable industry tailwinds arising from US import tariffs on China products, should provide a relative strong investment thesis for years to come.

• Earnings adjustment. We lower our FY24F earnings by 21% after recalibrating FY24 total capacity assumptions to 24.5bn from 30.5bn and taking into account cost inflation of raw material prices. We raise our FY25F26F by 2% and 6% to account for more favourable USD/MYR assumptions (FY25F-26F: 4.30/4.20 from 4.00/4.10). Post earnings adjustment, our TP is now at MYR2.60. Valuation remains compelling, with the stock trading at 48x FY25F P/E, or +1SD from its 2-year historical mean of 39x.

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

Source: RHB Securities Research - 18 Nov 2024