KUALA LUMPUR: Kossan Rubber Industries Bhd's core losses of RM20.5 million for its first quarter (Q1) financial year 2023 (FY23) is below Hong Leong Investment Bank Bhd's (HLIB Research) and consensus estimates.
The bank noted that the key variance was due to higher-than-expected costs.
"Kossan's Q1 FY23 core losses of RM20.5 million were below both our (RM47.6 million) and street (RM59.5 million) full-year estimates.
"Weaker performance resulted from lower average selling value (ASP), sales volume, and heightened costs. Core net profit was arrived at after adding back EIs (mainly unrealised loss on derivatives) amounting to RM3.7 million," it said.
HLIB Research noted that while some glove makers attempt to push through an ASP increase to compensate for the higher raw material costs, the price hike might not be sustainable.
"This would be difficult for glove makers to continue justifying further price increases after the end of the wintering season (expected in May).
"Natural gas costs (which track the crude oil price) are also expected to ease moving into Q2 of 2023, making it more challenging to implement additional price hikes.
"ASP revision could potentially be done at the expense of sales volume, as Chinese players are still pricing their gloves lower at circa US$17 per 1,000 pieces, versus Malaysian producers' US$20–22 per 1,000 pieces," it said.
After updating annual report figures and higher cost assumption revisions, RHB Research's earnings forecasts for FY23/FY24 are lowered to RM88.5 million/RM120.8 million (from -RM47.6 million/RM126.3 million).
It also introduced new FY25 earnings projections of RM151.7 million for Kossan.
"Given the unfavourable risk-reward profile, we downgrade our rating on Kossan to Sell from Hold previously.
"Our target price is also lowered slightly to 99 sen from RM1.00 previously, post updating of FY22 annual report figures," it added.