KOSSAN: Operational Efficiencies Drive Strong Earnings, Analyst Raises Price Target

A leading glove manufacturer has reportedly exceeded earnings expectations, primarily buoyed by robust cost efficiencies. A recent investment bank research report indicates a significant improvement in the company’s outlook, leading to an upgrade in its rating and a revised upward target price.

Performance Review

The company recorded a core net profit of MYR24.9 million for the second quarter of 2025 (2Q25), contributing to a first-half (1H25) core net profit of MYR55.8 million. This performance aligned with the investment bank’s expectations, accounting for 48% of its full-year 2025 forecast and 39% of market consensus, despite a year-on-year decline in 2Q25 core earnings. The quarter-on-quarter (QoQ) decline in 2Q25 core profit (19%) and weaker topline (21%) was primarily attributed to a 10-day production halt from natural gas supply disruptions, global container vessel shipment issues, and the deferment of customer orders due to US tariff policy uncertainties. Nevertheless, these headwinds were partially offset by enhanced operating efficiencies, particularly within the gloves division, which fueled a notable 7.5-percentage point QoQ expansion in the group’s EBITDA margin. Plant utilisation for the quarter was estimated at 61%.

Margin Analysis

The gloves division demonstrated strong profitability, with its PBT (Profit Before Tax) margin expanding by 1 percentage point QoQ to 9.8%. This improvement was driven by higher average selling prices (ASP) and improved production efficiencies, with the division now contributing 80% to the group’s total PBT, up from 77% in 1Q25. In contrast, the technical rubber division experienced a 3-percentage point QoQ decline in PBT margin due to an unfavourable product mix. The cleanroom division’s PBT margin also saw a 4.8-percentage point QoQ decline, largely impacted by the depreciation of the USD against the MYR.

Future Outlook and Valuation

The investment bank anticipates that the inventory adjustment period will conclude by June/July, paving the way for a potential recovery in sales volumes by 3Q25. Looking ahead, ASPs are expected to remain largely flat QoQ, supported by the easing of raw material prices, with nitrile down 6% and latex down 5% quarter-to-date for 3Q25. This moderation in raw material costs is expected to partially mitigate potential cost increases arising from the implementation of an expanded Sales & Services Tax (SST) since July and mandatory Employees Provident Fund contributions for foreign labour effective in October. Consequently, the bank has raised its FY25-27F earnings forecasts by 13%, 10%, and 9%, respectively, following a revision in raw material cost assumptions. A new Discounted Cash Flow (DCF)-derived target price of MYR1.38 (including a 4% ESG discount) has been established, representing an upgrade from the previous MYR1.23. This new target price implies a 0.9x FY26F P/BV, which is 1.1 standard deviations below its 3-year historical average.

Key Investment Risks

Potential risks identified include lower-than-expected sales volumes, a weaker-than-expected USD against the MYR, and higher-than-expected raw material prices.