Near-term weakness more than priced in
? FY21 core net profit of RM2.9bn (+183% yoy) missed estimates, due to weaker-than-expected sales volume in 4Q21.
? We expect Kossan to post a 90% yoy decline in FY22 net profit, due to: i) declining ASPs, ii) slower glove demand and iii) lower economies of scale.
? Maintain Add as the stock offers 21.3% upside to our TP at RM2.05 and backed by RM0.94 per share net cash as at 4Q21 (54.4% of mkt cap).
FY21 core net profit grew 183% yoy; earnings miss in 4Q21
4Q21 net profit came in at RM219m (-55.5% yoy), bringing FY21 net profit to RM2.9bn (+183% yoy). This was below both our (94%) and Bloomberg consensus full-year estimates (96%). The earnings miss in 4Q21 was mainly owing to lower-than-expected sales volume from slower customer demand and supply-led operating environment. Kossan announced an interim dividend of 8.6sen/share, bringing FY21 dividend to 48sen/share (42.9% div payout) which was below our expectations of a 60% payout.
Weaker qoq results were owing to a sharp dip in ASPs
4Q21 revenue and core net profit waned qoq by 29% and 58.6%, respectively. This was owing to a decline in ASPs (-35% to -40% qoq) as a result of slower buying patterns from customers and global glove capacity build up as well as lower economies of scale. Despite qoq growth in 4Q21 sales volume (+13% to +18% qoq), 4Q21 EBITDA margins still declined 22.8% pts qoq to 31.8% in tandem with the decline in ASPs.
Expecting a 90% yoy decline in FY22 net profit
Heading into FY22, we expect Kossan to post a 90% yoy drop in net profit as we see declining ASPs (supply-led dynamics in the global glove sector), slower sales volume (lower spot orders and production restrictions during EMCO), and increasing capacity in the global glove sector (aggressive expansion plans). In view of lower-than-expected industry ASPs, we lower our ASP estimates (US$26.6/US$26.1 per 1k pieces in FY22F/23F from US$35.1/US$27.9 previously).
Weak outlook more than priced in at current levels, in our view
In our view, Kossan’s weak near-term outlook has been fully priced in at the current valuations. The stock now trades at 14x CY23F P/E; a 25.7% discount to the glove sector’s CY23F P/E of 19.4x. Kossan also had a net cash position of RM2.4bn at end-FY21, which translates into 93.8sen/share (54.4% of market cap).
Maintain Add, with lower TP of RM2.05 (17x CY23F P/E)
We lower our FY22-23F EPS to account for lower ASPs while we introduce our FY24 EPS estimates. In tandem with our EPS cut, our TP is lowered to RM2.05 (17x CY23F P/E, inline with its 5-year historical mean). We reiterate our Add call, as we believe that current valuations (15% discount to its 5-year historical mean of 17x) have more-than priced in its weak near-term earnings outlook. It is also backed by its strong balance sheet market and position among top ten glove makers globally.