Kenanga Research maintained UNDERPERFORM call on Kossan Rubber Industries Bhd (Kossan) as it believes the sector’s recovery path remains bumpy with continued predatory pricing by certain overseas players and massive overcapacity.
However, the research house said Kossan’s financial year ended 31 December 2023 (FY23) beat its forecast by by 12% due to lower-than-expected input cost but met market expectations.
“We raise our FY24F net profit by 33% as we lift our Ebitda margin assumption to 16% from 14% and introduce our FY25F numbers.
Consequently, it raised its FY24 net profit forecast by 33%, and lifted its target price (TP) by 6% to RM1.48 from RM1.34 to reflect the rolling forward of our valuation base year to FY25F from FY24F.
“The basis of our TP is based on 1 time FY24F book value per share (BVPS), at 40% discount to the sector’s average of 1.7 times charted during previous downturns in 2008 to 2011 and 2014 to 2015.
“Our TP reflects a 5% discount to account for a 2-star environmental, social, and corporate governance (ESG) rating as appraised by us. At 43 times forward price-earning ratio (PER) and forward (return on equity) ROE of 3%, its valuations are lofty despite the improved outlook.”
Kenanga said its fourth quarter of financial year ended 31 December 2023 (4QFY23) revenue fell 1%, which it posit, due to lower volume sales.
“Its earnings before interest, taxes, depreciation, and amortization (Ebitda) fell 19% in 4QFY23, we believe, due to higher input nitrile butadiene rubber price, and reduced economies of scale, particularly, poor cost absorption, as its utilisation rate continued to remain weak.
“As a result, its 4QFY23 core net profit fell 12% to RM36 million. A pleasant surprise was a 2 sen dividend declared which came in above our expectation.
Year-on-year, the research house said its FY23 revenue dropped 33% due to lower average selling price (ASP) and volume sales, and its net profit also plunged 68% in FY23.
“The industry expect volatile quarterly sales order as distributors or buyers sees no urgency to place sizeable orders or hold substantial stocks as supply is plentiful and readily available.
“We expect the operating environment to remain challenging in subsequent quarters, plagued by predatory pricing by certain overseas players (such as those selling below cost over an extended period of time to eliminate competitors) and massive oversupply.
Based on its estimates, Kenanga said the demand-supply situation will only start to head towards equilibrium in CY26 when there is virtually no more new capacity coming onstream.
“Meanwhile, the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.”
Malaysian Rubber Glove Manufacturers Association (Margma) projects 12% to 15% growth in the global demand for rubber gloves annually from CY23, following an estimated 25% contraction to 300 billion pieces in CY23
“We project the demand for gloves to rise by 30% in 2024 to 390 billion pieces, due to a low base effect in 2023, and resume its organic growth of 15% thereafter.
“This will result in an excess capacity of 212 billion pieces in 2024. The overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry in this year,” it added.
The key risks to Kenanga’s recommendation are certain Chinese glove giants stop their predatory pricing strategy, stronger-than-expected growth in demand for gloves, industry consolidation and epidemic and pandemic occurrences.
