Profit starting to normalise

Profit above expectations

Kossan’s 3Q21 net profit of MYR528m (-50% QoQ, +52% YoY) was above our and consensus full-year estimates. The QoQ decline in 3Q21 earnings performance was dragged by lower ASP and utilisation rate on stricter SOPs and EMCO in early July 21. We however raise our FY21 earnings forecasts by 6% to factor in lower raw material prices. Our TP is largely unchanged at MYR1.87 TP (+1sen; on 17.7x CY23 PER or -1SD of historical mean). Maintain SELL.

Results dragged by EMCO and lower ASP

3Q21 net profit was MYR528.2m (+51.5% YoY, -50.4% QoQ), bringing up 9M21 core net profit to MYR2,684.9m (+3.9x YoY). This accounted for 96%/86% of our/street’s full-year forecasts. The earnings gap could be due to lower-than-expected latex and nitrile latex prices. Elsewhere, the QoQ decline in 3Q21 earnings was due to lower utilisation rate on stricter SOPs under the National Recovery Plan (NRP) and EMCO in early July as well as declining ASP. Kossan announced 3rd interim DPS of 12 sen (9M21: 36 sen); above expectation.

Key highlights from 3Q21 results

The QoQ decline in 3Q21 earnings was mainly due to: (i) 15-20% decline in blended ASP to USD66-70/’000 pieces in 3Q21. Sales volume also declined by -25% to -30% QoQ in 3Q21 due to stricter SOPs under the NRP since June 21 and EMCO in early July 21; (ii) gloves manufacturing division’s PBT margin declined to 56.6% (-8.6 ppt QoQ) as the decline in ASP outweighed
the decline in NBR cost (-8% to -12% QoQ).

Earnings adjustments

We raise our FY21 earnings forecasts by +6.3% to factor in lower latex (-8%) and nitrile latex (-17%) assumptions while keeping our FY22/23 earnings forecasts largely unchanged (+0.3%/+0.4%). Our forecasts are based on FY21/22/23 blended ASP assumptions of USD71/26/23 per k pcs. Kossan’s balance sheet remained strong as at Sep 21 with net cash of MYR2.4b (MYR0.94/sh net cash). The strong balance sheet should be able to self-fund its capacity expansions for the next few years.