HLIB Research said rising costs will continue to exert downward pressure on Kossan’s earnings.
PETALING JAYA: Soft average selling prices (ASPs), low utilisation rate and increasing cost pressures continue to plague Kossan Rubber Industries Bhd
’s growth prospects in the near term, says Hong Leong Investment Bank (HLIB) Research.
The research house said the normalising demand post-Covid-19 and existing inventories continue to dampen the ASPs of gloves.
HLIB Research opined that ASPs will remain depressed in the quarters ahead, even as some smaller-scale glove manufacturers halted operations or exit the market entirely, as more time is needed to rectify the demand-supply imbalance.
“We gather that the Chinese nitrile glove players have slashed prices to about US$13.50 (RM58.85) per thousand pieces to continue defending market share, while Kossan’s nitrile gloves are priced at US$16 (RM69.80) presently.
“With idle capacity available, Kossan also took the opportunity to decommission two to three older manufacturing plants that are less efficient, and to only focus on newer and faster lines in order to improve cost efficiency,” said HLIB Research in a report.
The likelihood of weakened ASPs in the near term also hinders the group from employing cost-pass-through strategies to diminish cost pressures particularly on its labour, fuel, electricity and natural gas front.
The research house said rising costs will continue to exert downward pressure on Kossan’s earnings.
Plagued by the minimum wage revision and foreign labour shortage previously, Kossan’s labour costs have remained elevated, it said.
“The situation will be further aggravated moving into the financial year 2023, as we are expecting fuel costs and electricity costs to increase as well.
“Natural gas cost has increased from RM55 per metric million British Thermal Unit (MMBtu) in the fourth quarter of 2022 (4Q22) to RM64 per MMBtu in 1Q23, accounting for 30% of the cost of production.
“Separately, electricity cost has also gone up by around 30%,” said HLIB Research.
Nevertheless, the only silver lining for the group is the RM2bil cash pile, including RM1.3bil cash and money market investments of RM690mil, it is sitting on.
The research house said Kossan will still pay out dividends for profit-making financial years, adhering to its dividend policy of 30%.
“Kossan’s expansion plans will also be put on the back burner, as the low utilisation rate of about 50% is sufficient to cater for existing orders.
“Its cash pile accumulated during the upcycle will be crucial to help Kossan weather through the downcycle,” said HLIB Research.
The research firm maintained its “hold” call on Kossan with a lower target price of RM1, valued on a price-to-book multiple of 0.66 times.
“Despite the headwinds, we maintain our ‘hold’ rating on Kossan as we believe its strong cash position will help the group to better navigate the downturn,” it said.
