Kossan Rubber Industries Berhad- Stronger Performance Ahead But Priced In

Date: 22/05/2020

Source  :  PUBLIC BANK
Stock  :  KOSSAN       Price Target  :  8.80      |      Price Call  :  HOLD
        Last Price  :  3.56      |      Upside/Downside  :  +5.24 (147.19%)

Kossan reported a net profit of RM64.8m (+6.2% QoQ) in 1QFY20, which was in line with both our and consensus estimates at 24% and 23% respectively. Positives brought about by the Covid-19 pandemic has yet to be felt in the current reporting quarter as we reckon orders were secured prior to the outbreak-led demand surge. We are expecting Kossan to deliver stronger earnings growth for the subsequent quarters. We tweak our FY20-21F forecasts by 26-37% to factor in the ASP revision, higher sales volume as well as margin expansion. We roll over our valuation to CY21F EPS, and our TP is subsequently revised to RM8.80, pegged to a PE multiple of 29x (at +2SD of its 5-year historical mean). We believe the market has priced in the stronger performance ahead with share price risen by 72% since our upgrade in January and is now trading at +3SD. With limited upside, we downgrade our call from Outperform to Neutral. Kossan has also declared a dividend of 3sen per share.

  • Just the beginning. In 1QFY20, Kossan delivered a 5.7% QoQ growth in revenue to RM611.5m, predominantly due to stronger contribution from both its gloves segment (+7.1% QoQ) and cleanroom segment (+17.2% QoQ), which has entirely offset the lower revenue contribution from technical rubber segment (-14.5% QoQ). Better performance from its glove segment was supported by higher sales volume (+8.3% QoQ). ASP, however, was flat QoQ. Based on usual practice, orders are usually locked in 2-3 months ahead of delivery, and we believe the orders scheduled for delivery between the month of January to March was secured before the Covid-19 outbreak escalated globally, hence resulting in the flattish ASP QoQ. Kossan’s EBIT grew by 15.8% QoQ to RM86.3m, on the back declining raw material prices, as NBR prices were down by 6-8% QoQ. EBIT margin also expanded by 1.2ppts to 14.1% in 1QFY20.
  • Expansion. Plant 19 (+3bn pcs pa) has thus far commissioned 6 lines, with another 2 new lines in the midst of commissioning currently. We believe Kossan is on track to fully commission all 10 lines by 1HFY20. For Bidor, the Group is expecting begin construction works for its 1st plant in 3QFY20 and targets to commission the plant in FY21.
  • Expecting sequentially stronger profits. Note that 1QFY20’s results have yet to fully reflect the positives brought about by the Covid-19 outbreak. Kossan is currently locking in orders for delivery in 1QFY21, of which the ASP will only be determined 1-2 months prior to delivery. We are also expecting to see ASP increase starting from 2QFY20 onwards. Coupled with the falling raw material prices and higher operational efficiency, margins are also expected to expand going forward. As such, we raise our forecasts for FY20-21F by 26-37%, to account for the expected higher sales volume, rising ASP and improvement in margins.

Source: PublicInvest Research - 22 May 2020

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