KUALA LUMPUR: Kossan Rubber Industries Bhd could be loss making in the first quarter of financial year 2023 (Q1FY23) as utilisation rate remains low at 50 per cent.
According to Public Investment Bank Bhd (PublicInvest), Kossan's earnings were expected to narrow in FY23 due to dampening average selling prices (ASPs) and escalating costs.
"As Chinese nitrile producers slashed prices to as low as US$13.50 per 1,000 pieces in November last year, ASPs are expected to remain under pressure in the coming quarters.
"Meanwhile, the average natural gas price has increased to RM64 per one million British thermal unit (MMBtu) in January 2023 from RM55 per MMBtu, while electricity cost increased by over 30 per cent. In addition, labour cost remains elevated due to supply shortage," PublicInvest said.
Although latex prices had eased, the firm said it was not sufficient to offset the impact of rising energy and labour costs.
However, Kossan's Technical Rubber Product segment should provide some cushioning effect though contribution is unlikely to grow, but to remain stable in the near term.
PublicInvest added that overall market demand remained weak with consumption falling below pre-pandemic level, mainly due to stockpiling and inflationary pressure.
"Therefore, we believe major customers would not have the urgency to place huge orders in the near term.
"Even though China is currently facing an outbreak due to the highly contagious Omicron variant known as XBB.1.5, a sudden surge in demand for imported gloves is not expected to occur as China has sufficient capacity to meet the potential increase in consumption," it said.
PublicInvest said Kossan was taking steps to reduce cost as well as conserve cash.
Despite its strong net cash position of RM1.9 billion, Kossan has placed its near-term expansion plan on hold amid oversupply issues.
"The number of its total workforce has also been cut from 7,000 to 5,000. We believe staff strength will continue to fall as Kossan adopts greater digitalisation in its production process."
PublicInvest trimmed its FY23-25 earnings forecast by 39-40 per cent to reflect lower ASPs and higher operating cost.
It also downgraded its call on Kossan to "Underperform" with a lower target price of 75 sen from RM1.23 previously.