Kossan Rubber which recently reported its 1HFY22 core earnings came in below MIDF’s expectation, the group recorded a core PATANCI of RM137.1m, which came in below projection but within consensus’. It accounted for 41.9% and 46.5% of consensus full-year estimates.
The key variance was attributable to a faster-than-expected decline in the ASPs along with a higher-than-expected input cost. There was no dividend announced for the quarter.
2QFY22 core PATANCI of RM47m was -47.8qoq lower in line with revenue that plummeted -14.6%qoq to RM589.9m. This was primarily caused by a lower ASP (average -12.5%qoq) and volume sold (-1%qoq) amidst an oversupply of gloves in the market. Sales in the glove and technical rubber divisions dropped -15%qoq and – 21.8%qoq, respectively, to RM517.7m and RM38.6m. Meanwhile, sales in the cleanroom division increased by +8.6%qoq to RM30.9m. Pre-tax margin decreased -6.5%ppts as a result of higher input cost for energy, labor and raw material costs (average +5.5%qoq increase in NBR and
+3%qoq increase in NR).
Core PATANCI for the 1H22 period slumped by -93.6%yoy to RM137.1m in tandem with a -71.1%yoy decline in revenue. This is mainly due to the tapering demand for rubber gloves amid an oversupply of gloves, intense competition, and the shift to endemic which resulted in the ASPs dropping. This was further dragged by decreased cleanroom product ASP and lower automotive segment deliveries, both of which contributed to a reduction in sales across all three divisions.
MIDF turned wary that the ASPs for gloves would decline to levels below those of pre-covid before the uneven demand-supply dynamics returned to normal. This is mainly because of an overstock situation in the industry, which is characterised by intense competition from Chinese glovemakers, aggressive capacity installation from both existing and new entrants, and lower customer deals. We anticipate that margin erosion will continue in the near term due to the inability to fully pass on the cost to the customer with the rising input costs noted above.
MIDF is revising its FY22-23F core PATANCI estimates by -13.4% and -15.7% to RM283.5m and RM281.7m respectively, to better reflect the margin compression after factoring in a lower ASP and higher input cost. Meanwhile, the research house raised its FY24F earnings projection by +10.5% to RM284.8m in view of stabilized raw material prices.
The stock is given a NEUTRAL call with a lower TP of RM1.28 (from RM1.34).
