Kossan Rubber Improved Outlook But Valuations Lofty, Says Kenanga

Kossan Rubber Industries’ (Kossan) 9MFY23 results beat expectations with a surprise profit for 3QFY23 thanks largely to lower input costs.

Kenanga Research projects a RM44m net profit in FY23 (from a RM76m loss), and have raised their FY24F earnings by 3x from a low base and lifted their TP by 5% to RM1.34 (from RM1.28).

Nonetheless, its valuations are lofty despite the  improved outlook. Kennaga has Downgraded the stock  to UNDERPERFORM from MARKET  PERFORM.

KOSSAN’s 9MFY23 results beat expectations with a small profit of  RM13m vs. our full-year net loss forecast of RM76m and a full-year  consensus net loss of RM66m. The variance against our forecast came  largely from lower-than-expected input costs.

QoQ, its 3QFY23 revenue rose 4% due to higher volume sales (+10%) which more than offset a lower ASP (-5%). Its EBITDA rose >100% albeit  from a low base effect in 2QFY23 and also due to, (i) lower  natural gas price (-8%) and input raw material prices (-15%) and (ii)  marginally improved utilisation rate. As a result, its 3QFY23 returned to  the black registering a net profit of RM41m compared to a loss of  RM3.3m in 2QFY23.

No dividend was declared in this quarter as  expected. YoY, 9MFY23 revenue dropped 35% due to lower ASP (-23%)  and volume sales (-25%). This brings 9MFY23 net profit to RM13m  compared to a profit of RM159m in 9MFY22. 


Kenanga expects the operating environment to continue to remain  challenging as the sector continues to grapple with subdued ASP and  low plant utilisation amidst intense competition, especially from Chinese  producers.

The ASP is expected to come under pressure in the next two  quarters following lower natural gas prices, as competition will compel glove players to eventually pass on the cost savings to customers. 

Moreover, Kenanga gathered the industry expects volatile quarterly sales orders as distributors or buyers sees no urgency to place sizeable orders or hold  substantial stocks as supply is plentiful and readily available.

Kenanga expects the operating environment to remain challenging in  subsequent quarters, plagued by massive oversupply. Nevertheless, they expect the oversupply situation to be less acute and gradually improve  following signs of players culling production capacity via decommissioning of selective plants.

Based on Kenanga’s estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.

The Malaysian Rubber Glove Manufacturers Association (Margma) projects 12%−15% growth in the global demand for rubber gloves annually from 2023, following an estimated 19% contraction to 399b pieces in 2022. It believes the supply-demand equilibrium may return in 6−9 months.

However, Kenanga begs to differ, expecting the overcapacity situation to persist at least over the next 12 months. We project the demand for gloves to rise by 15% in 2023, which is consistent with  Margma’s forecast.

This will result in an excess capacity of 112b pieces (instead which is similar to CY22. Despite the improvement, the overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry in 2023.

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