Highlights

Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Wed, 8 Jul 2020, 9:37 AM

 

Kossan Rubber Industries - ASP Lift-off

Author:   |    Publish date:


We are positive on Kossan’s prospects ahead over the next few quarters. Management is confident of sustained strong demand at least till end-1QCY21, wringing extra earnings from an additional 10% utilisation from pre-pandemic 85%- 90% level and margins expansion from four new lines catering to spot customers. However, the lag impact from ASP hike can only be felt in 2H 2020. We raised FY20E/FY21E net profit by 11%/17%, to account for higher margins. TP is raised from RM9.60 to RM11.20 based on 30x FY21E EPS. Reiterate OP.

Consensus under-appreciating higher ASPs’ impact. We are positive on Kossan’s prospects ahead over the next few quarters. Management is confident of strong demand at least till end 1Q 2021, wringing extra earnings from additional 10% utilisation from pre-pandemic 85%-90% level and margins expansion from four new lines catering to spot customers. However, the lag impact from ASP hike can only be felt in 2H 2020. We highlight that market consensus is under-appreciating the potential impact from higher-than-expected ASPs in this continuing pandemic and tight supply condition. Due to the tight supply situation, we expect buyers to jockey for position in order to secure allocation which will push up ASPs. Personal Protective Equipment (PPE) of which glove is one of the components is presently much sought after due to limited supply. Longer delivery lead times are indicating that demand will outstrip supply at least over the medium-term.

Game changer, potential further PER re-rating. Anecdotal evidence suggest a potential further PER re-rating as Kossan is expanding capacity more aggressively compared to the past. Recall, beyond Plant 19, land clearing is underway at the Bidor plant, and the first plant is expected to start commercial operation in 2021, earlier than the previously targeted 2022.

Plant 17,18 and 19 to boost earnings over next two years. We understand that Plant 18 (2.5b pieces) was fully commissioned in Nov 2019. Plant 19 (3.0b pieces) currently has two to three lines commissioned and another two expected to be commissioned soon and on track for full operations by 1H 2020. Upon completion, these three new plants will bring the group’s total installed capacity to 32b (+28%) pieces of gloves per annum.

Raised FY20E/FY21E net profit by 11%/17%. We raise FY20E/FY21E net profit by 11%/17%, taking into account higher EBITDA margin assumption from 18% to 20%.

Trading at unwarranted 35% PER discount valuation to bigger peers. The stock has risen 111% YTD. We re-emphasis our bullish stance, expecting the stock to trade at +2.0SD in anticipation of a ramp up in demand from re-stocking activities and stronger average selling price (ASP); hence, expectation of sustained robust earnings growth in subsequent quarters. TP is accordingly raised from RM9.60 to RM11.20 based on 30x FY21E EPS (at +2.0SD above 5-year historical forward mean). Reiterate Outperform.

Key risk to our call is slower-than-expected commissioning of the new plants.

Source: Kenanga Research - 3 Jun 2020

Share this
Labels: KOSSAN

Related Stocks

Chart Stock Name Last Change Volume 
KOSSAN 11.36 +0.44 (4.03%) 6,428,600 

  Be the first to like this.
 


APPS
I3 Messenger
Individual or Group chat with anyone on I3investor
MQ Trader
Perform Technical & Fundamental Analysis on Stocks
MQ Affiliate
Earn rewards by referring your friends
 
 

504  270  590  857 

ActiveGainersLosers
Top 10 Active Counters
 NameLastChange 
 PDZ 0.21+0.12 
 PDZ-WB 0.06+0.03 
 VC 0.08+0.02 
 IRIS 0.27+0.01 
 MQTECH 0.075+0.01 
 MLAB 0.055+0.015 
 ANZO 0.20-0.035 
 DGB 0.05+0.015 
 KNM 0.23+0.015 
 TDEX 0.075+0.015 

FEATURED POSTS

1. MQ Trader - Introduction to MQ Trader Affiliate Program MQ Trader Announcement!
2. MQ Affiliate – A smarter way to earn more rewards MQ Trader Affiliate Program
3. MQ Affiliate – How to become an effective affiliate MQ Trader Affiliate Program
4. MQ Affiliate – Upgrading to Affiliate Partner MQ Trader Affiliate Program

TOP ARTICLES

1. Cimb revised capping for gloves gloveharicut
2. CLSA: GLOVE supply shortage forecasted throughout the next 3 years. TOPGLOV (RM28) HARTA (RM20) KOSSAN (RM13) gloveharicut
3. BURSA'S PN17 RELIEF MEASURES RESULTING IN AIRASIA TRIGGERING SUSPENDED CRITERIA BUT NOT CLASSIFIED AS A PN17 LISTED ISSUER Good Articles to Share
4. BNM CUTS OPR BY 0.25 BASIS POINTS !!! THIS CONSTRUCTION STOCK DEFINITELY TO BE WATCHED !!! Bursa Master
5. Supermax Corporation - Heads I Win, Tails I Win Too Kenanga Research & Investment
6. Technical View - MY E.G. Services Bhd (MYEG,0138) Rakuten Trade Research Reports
7. HLIB: There are still legs to GLOVE rally and it is only in midst of a rerating gloveharicut
8. Malaysia Rubber Gloves – 2nd Wave Is Coming; Get Ready for the Ride KL Trader Investment Research Articles
Partners & Brokers