Highlights

Kossan Rubber Industries - ASP Lift-off

Date: 03/06/2020

Source  :  KENANGA
Stock  :  KOSSAN       Price Target  :  11.20      |      Price Call  :  BUY
        Last Price  :  6.25      |      Upside/Downside  :  +4.95 (79.20%)
 


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

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