ASP continues to decline
Negatives largely priced in; U/G to HOLD
Kossan’s 4Q21 net profit of MYR218.7m (-56% YoY, -59% QoQ) was in line. The QoQ decline in 4Q21 earnings performance was mainly dragged by lower ASP. We lower our FY22-23 earnings forecasts by -41%/-8% to factor in lower ASP and utilisation rate assumptions as well as the Prosperity tax. Our TP is lowered to MYR1.71 (-16 sen; on an unchanged 17.7x CY23 PER or -1SD of historical mean). After the selloff, risk-reward in the stock appears evenly balanced. U/G to HOLD.
Results in line
4Q21 net profit was MYR219m (-56% YoY, 59% QoQ), bringing up 2021 core net profit to MYR2.9b (+1.8x YoY). This accounted for 98%/96% of our/street’s full-year forecasts. The YoY and QoQ decline in 4Q21 earnings was mainly due to declining ASP and logistics challenges i.e. capacity constraints on vessels, partially offset by higher volume. Kossan announced 4th interim DPS of 12sen in 4Q21 (2021: 48sen); above our expectation.
More details on 4Q21 results
The QoQ decline in 4Q21 earnings was mainly due to: (i) 35-40% decline in blended ASP to c.USD40/’000 pieces in 4Q21. This is despite the +13- 18% increase in sales volume in 4Q21; (ii) gloves manufacturing division’s PBT margin declined to 34% in 4Q21(-22.3 ppt QoQ) as the decline in ASP outweighed the decline in NBR cost (-25% to -30% QoQ).
Earnings adjustments; Upgrade to HOLD.
We lower our FY22/23 earnings forecasts by -41%/-8% to factor in: i) prosperity tax in 2022, ii) lower utilisation rate of 75%/75% (from 80%/80%) for FY22/FY23 and iii) new blended ASP assumptions of
USD24/23 (from USD26/23 per k pcs) for FY22/23. We introduce our FY24 earnings forecasts (USD23/k pcs ASP). Kossan’s balance sheet remained strong as at Dec 21 with net cash of MYR2.3b (MYR0.93/sh net cash). Although the overhang related to declining ASP and stiff competition is unlikely to disappear anytime soon, we believe the negatives have been largely priced in after the stock declined by -29% since our downgrade to SELL in early Oct 2021.