KUALA LUMPUR: Kossan Rubber Industries Bhd could brace industry-wide headwinds with average selling prices (ASPs) and margins continue to remain under pressure, said Hong Leong Investment Bank Bhd (HLIB Research)
Analyst Sophie Chua Siu Li said supply continues to outpace demand, leading to tighter competition within the industry.
"ASP is expected to continue falling even though raw material prices have been coming off gradually, given the inflationary pressure in other aspects such as higher energy and labour costs," she said in a research note today.
Nonetheless, she said margins could normalise closer to pre-Covid levels.
She said Kossan Rubber suffered a 29 per cent decline in revenue as the fall in ASP between 35 per cent and 40 per cent had neutralised the positive effects of higher sales volume, despite sales volume growing by 13 per cent to 18 per cent.
"The improvement in sales volume was a combination of low base effect (imposition of Enhanced Movement Control Order (MCO) in the third quarter (Q3) last year), restocking by clients as well as orders that were unable to be delivered in Q3 being shipped out in the fourth quarter (Q4)."
Kossan Rubber's growth in sales volume could have been stronger quarter-on-quarter should there be no shipping disruptions in Q4.
"Margins have continued to come under pressure as Nitrile Butadiene Rubber (NBR) prices declined between 25 per cent and 30 per cent, albeit at a slower rate compared to the ASPs.
Kossan Rubber's net profit plunged 60 per cent year-on-year (YoY)to RM218.67 million for Q4 ended December 31, 2021, from RM543.42 million posted previously.
In an exchange filing yesterday, the company said this was attributed to lower sales and normalisation of the ASP across its glove, technical rubber products and clean-room segments.
Its Q4 revenue dropped 29.3 per cent to RM924.56 million from RM1.31 billion recorded a year ago.
For the full financial year ended December 31, 2021 (FY21), Kossan's net profit catapulted 162.6 per cent to RM2.85 billion from RM1.09 billion, while revenue jumped 83 per cent to RM6.66 billion from RM3.64 billion.
Kossan Rubber has also declared a fourth interim dividend of 12 sen per share, which amounted to RM306.19 million, payable on April 22, with April 5 as the ex-date.
HLIB Research maintained a Hold call and lowered Kossan Rubber's earnings forecast for FY22 to FY23 by 43 per cent and 67 per cent on account of the lower ASP as well as higher operating costs.
"Consequently, our target price is lowered from RM2.65 to RM1.53, implying a valuation of 12.0 times price-earnings to ratio (at -0.5SD of its five-year average) on its FY22 earnings per share of 12.7 sen."
