KUALA LUMPUR: The recent drop in average selling price (ASP) for gloves signifies the acceleration in overall market ASP normalisation, said Kenanga Investment Bank Bhd (Kenanga Research).
Analyst Raymond Choo Ping Khoon could not ascertain how long the ASP will fall but believe it would unlikely to go below the pre-Covid pricing considering that the cost structure has risen, including social compliance costs and the high nitrile feedstock cost compared to the pre-Covid era.
"Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment.
"Nonetheless, our 2021's ASP assumption remains at US$28 per 1,000 pieces," he said in a research note today.
Kenanga Research has lowered Kossan Rubber Industries Bhd's net profit for the financial year ending December 31, 2021 (FY21) by 8.0 per cent after factoring in a lower utilisation rate at 83 per cent from 90 per cent into its earnings model.
"We maintain our target price at RM2.45 based on 12 times FY22 earnings per share. Although ASPs are no longer lofty, expectations of disappointments in subsequent quarters are expected to be capped," he said.
Choo said key risks to its call include ASP falling steeper and sooner than expected and faster-than-expected vaccine roll-outs.
Meanwhile, Kossan Rubber has planned capacity expansion over the next two years, leveraging on Plant 20 located adjacent to Plants 18 and 19, with 1.5 billion pieces capacity, which is expected to be fully commissioned by the fourth quarter this year.
The company's land in Meru, located adjacent to one of its existing plants, was also earmarked for a single plant with 5 billion pieces capacity to be completed in two phases, which will likely begin to commence in the second half of 2021.
"Upon completion, these three new plants will bring the company's total installed capacity from 32 billion to 42.4 billion, 33 per cent additional pieces of gloves per annum," it added.
Hong Leong Investment Bank Bhd (HLIB Research) analyst Sophie Chua Siu Li Kossan Rubber's lines commissioning is ongoing for Plant 20, comprising five lines with an additional 1.5 billion pieces per annum.
"It is targeted to complete in Q4 of 2021, which in our view could potentially be due to disruptions caused by the lockdown and National Recovery Plan.
"We expect Kossan Rubber to deliver sequentially weaker earnings in the coming quarters, given the falling ASPs," she said in a research note today.
She said higher energy costs and social compliance costs could also erode Kossan Rubber's margins further, as the glove buyers began to regain bargaining power and the glove manufacturers could absorb part of the cost increase.
"We reiterate a Hold call for Kossan Rubber with a target price of RM2.65, implying a price-earnings multiple of seven times on its FY22 earnings per share of 38.1sen."
