KUALA LUMPUR: Kossan Rubber Industries Bhd's first half of 2024 (1H24) total core earnings of RM52.1 million came in below Hong Leong Investment Bank's (HLIB) research and consensus' expectations at 28 per cent and 36 per cent respectively.
The research firm reduced its forecasts for financial year 2024 (FY24) by 38 per cent and six per cent for both FY25 and FY26, mainly reflecting its lower sales volume and profit before tax margin assumptions for the glove segment after taking recent logistics disruptions and the abrupt strengthening of the ringgit against the US dollar into consideration.
"Globally, we forecast glove demand-supply dynamics to reach equilibrium in 2025. Going into the third quarter of 2024 (Q3 2024), we expect Kossan to deliver less than 10 per cent quarter-on-quarter (QoQ) sales volume growth, consistent with Hartalega's guidance.
"In terms of average selling price, we believe Kossan will be able to raise it marginally to partly pass on higher nitrile butadiene rubber (NBR) prices amid strong domestic competition," it said in a note.
In terms of input costs, NBR prices are expected to increase by three to five per cent QoQ due to limited supply but will be partially mitigated by natural gas price moderation by five per cent.
"However, we believe Kossan will not pass on the recent abrupt strengthening of the ringgit against the US dollar to customers in view of the competitive domestic landscape, which could impact its profit margin."
It maintained a "buy" call on the stock with a lower target price of RM3.
HLIB Research expects Kossan to deliver stronger sequential earnings from Q4 2024 onwards, underpinned by an ongoing inventory replenishment cycle, potential trade diversion from the US to Malaysia as a result of US FDA import alert issues, and a higher import tariff on China in 2026, as well as a higher profit margin from economies of scale.