Kossan Rubber Industries - Expected Rosy 2Q Onwards

Date: 27/07/2020

Source  :  HLG
Stock  :  KOSSAN       Price Target  :  17.75      |      Price Call  :  BUY
        Last Price  :  6.07      |      Upside/Downside  :  +11.68 (192.42%)

We dialled into Kossan’s sell-side analysts’ briefing and here are some key takeaways. We expect to see ASPs to increase by c. 20-40% from 1Q’s ASPs. Utilisation rate is currently >90% vs. pre-Covid-19 c.80% and lead time has increase to 12 months vs. pre-Covid-19 of 45-60 days. We increase our FY21-22 earnings forecast by 8-19% with more clarity on expansion plans. We maintain BUY with higher TP of RM17.75 (from RM16.37). Our TP is based on FY21 earnings pegged to PE multiple 31x (+2SD above 5 year mean).

We dialled into Kossan’s sell-side analysts’ briefing on Fri, here are some key takeaways.

ASPs. 1Q20 results only saw a marginal increase in earnings, as demand started to only increase significantly towards end-Mar (when Covid-19 outbreak became rampant in Europe and the US – Kossan’s primary market). With ASPs being fixed 1.5-2 months prior delivery, we expect the increase in prices will start to be reflected in deliveries towards end 2Q20 and fully reflected in 2H20. As we understand, preliminary prices indicate Jul and Aug would be seeing an increase of c.20% and 40% vs. 1Q20, respectively, and further c.5% increase MoM till year end. Furthermore, spot orders ASPs is lingering around USD60-80 per 1,000 pieces.

Utilisation rate and lead time. Kossan shared that factories are currently running at >90% capacity vs. 1Q20: c.90% vs. FY19: c.80%. Current lead time is c. 12 months (vs. pre-Covid-19: 45-60 days). Moving forward, as we understand, enquiries have started on orders for 2H21; hence we are hopeful on greater FY21.

Expansion. Kossan shared some capacity expansion plans. Current capacity stood at 29bn pieces (as at 1Q20). Plant 19 is expected to run with full 10 lines by Aug 2020 as per planned. By end FY20, Kossan will have a total capacity of 32bn pieces (+10% YoY). The new expansion on the land beside Plant 18 and Plant 19, “Plant 20” will have an addition of 1.4bn pieces with 5 lines in 1H21. The new land purchase in Meru, Klang would start kicking in production as early as 2H21, with 6 lines that will produce 2bn pieces. Thus, bringing Kossan’s FY21’s total capacity of 35.4bn pieces (+10.6% YoY). With the new capacity adding in, Kossan will be able to allocate c.10-15% of production for spot orders (currently c.10%).

Forecast. We have reflected in earnings increase back in our sector report (15 Jul), however with more clarity on expansion plan, we update our model and our FY21-22 earnings increase by c.8-19%.

Maintain BUY, TP: RM17.75. We maintain BUY with higher TP of RM17.75 (from RM16.37), post earnings adjustments. Our TP is based on FY21 EPS pegged to 31x PE (+2SD above 5-year mean)


Source: Hong Leong Investment Bank Research - 27 Jul 2020

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