Staying on its downward trend
- 1H22 core net profit of RM139.0m (-93.6% yoy) was below expectations due to weaker-than-expected sales volume and ASPs recorded in 2Q22.
- Despite its weak near-term outlook, we believe that valuations will be supported by its strong net cash position of RM2.2bn (87.3 sen/share).
- We lower our FY22-24F EPS to account for weaker ASPs and slower demand and downgrade to Hold. TP is lowered to RM1.38 (17x CY23F P/E).
2Q22 core net profit waned 95.5% yoy; below expectations
2Q22 core net profit came in weaker than expected at RM48.9m (-95.5% yoy), owing to lower-than-expected sales volume (-23% to -28% yoy) as well as greater-than-expected decline in average selling prices (-65% to -70% yoy). Accordingly, 1H22 core net profit of RM139.0m (-93.6% yoy) fell short of expectations, at 47% of both our and Bloomberg consensus full-year estimates. No dividend was declared in 2Q22, as expected.
Weaker qoq results mainly due to softer sales volume and ASPs
On a qoq basis, 2Q22 revenue and net profit declined by 14.6% and 45.7%, respectively. This was owing to: i) lower sales volume (-1.0% qoq), ii) lower ASPs (-10% to -15% qoq) and iii) weaker economies of scale. Note that 2Q22 EBITDA margin came in at 15.6% (- 5.9% pts qoq), further aggravated by higher operating costs and rise in raw material prices.
Greater-than-expected decline in ASPs leading to weaker profit
We expect Kossan’s outlook to remain gloomy, particularly in 2H22 (lower hoh). While we previously believed that ASPs would stabilise at US$23-24 (per 1k pieces), we gather that market ASPs have trended lower to US$21-22. This is owing to sluggish demand and rising capacity in the global glove sector. Hence, we see the possibility of sharp margin compression in the next six months (potentially below pre-Covid-19 levels) given weak ASPs and higher operating costs (labour, utilities, etc.). We do not expect Kossan to dip into losses in 2H22, though we see lower qoq results in the remaining quarters in FY22.
Valuations to be supported by its strong balance sheet
Despite Kossan’s weak near-term outlook, we are of the view that this is largely priced in at its current valuations. It is trading at 16.5x CY23F P/E, near its 10-year mean of 16.9x. We also believe that its share price will be supported by its net cash position of RM2.2bn as at end-2Q22, translating into 87.3 sen/share (65.5% of market cap). Note that Kossan is also trading at a 12.2% discount to its NTA of RM1.51/share.
Downgrade to Hold from Add, with lower TP of RM1.38 (17x CY23F)
We cut our FY22-24F EPS to account for further weakness in sales volumes and ASPs. In tandem with our EPS cuts, our TP is lowered to RM1.38 (17x CY23F P/E, in line with its 5- year historical mean). We downgrade to Hold from Add. While earnings could be weaker in 2H22 (further potential downside risk to earnings if ASPs fall below US$21 per 1k pieces), we believe the downside risks could be offset by its strong net cash position (65.5% of market cap) and long-term inelastic demand of rubber gloves globally.
