Kossan - Greater Expansion Plan and ASP to Boost Earnings Further

Date: 27/07/2020

Source  :  BIMB
Stock  :  KOSSAN       Price Target  :  20.00      |      Price Call  :  BUY
        Last Price  :  6.03      |      Upside/Downside  :  +13.97 (231.67%)

  • We remain positive on Kossan’s prospects over the next few quarters following the latest expansion plan revealed by management, plus higher-ASPs-than-expected from 2Q20 onwards.
  • Gloves demand likely to sustain in 2021 backed by unabated Covid- 19 and resurgence fears, supporting higher ASPs until 1H2021.
  • Kossan revealed a new expansion plan with total installed capacity rising to 42.4bn pcs p.a. (+33%) in CY2022.
  • We revised our FY20/FY21 earnings by +67%/+100% and maintain BUY with higher TP of RM20.00. This is based on 30x PER pegged on FY21 EPS of 66.7 sen.

Demand visibility to be sustained in 2021

Demand for gloves is anticipated to be sustained in 2021 due to incessant worldwide spread of Covid-19 with some countries yet to reach peak infections and resurgence risks, on the assumption that mass vaccine production will not be available at least until mid-2021. We gathered that Kossan’s current order lead time is about 12 months with utilisation rate of >90% and moving forward, we are also made aware that enquiries have started on orders for 2H21. The group has also received 10-50% deposits from customers to secure the orders.

ASP continues to trend upwards

Kossan guided that ASP for Jul and Aug is expected to increase by c.20% and c.40% respectively compared with 2QFY20 ASPs, and could see further c.5% mom increase until year end. Kossan is also expecting to increase its ad-hoc/ spot orders allocation up to c.15% of its total capacity (currently c.10%). The sustained strong demand with orders filled up till end-1H21 and ASPs being fixed 2 months prior delivery, could see the increase in prices to be fully reflected in 2H20. Overall, we estimate that selling prices will continue to increase until end of 2020 and stabilize in 1H2021 before gradually decreasing. We have raised our assumptions accordingly, as these were not forthcoming previously.

Greater expansion plan to cater for higher demand

Kossan’s current Plant 19 has commissioned 8 lines since January and on track for full commissioning by August 2020, boosting the total capacity to 32bn pcs p.a. (+10%) from 29bn pcs (as at 1Q20). In catering to the growing demand, management has recently revealed a new reconfigured additional expansion plan with a total installed capacity from 32bn to 42.4bn (+33%). The new additional planned capacity over the next 2 years are i) Plant 20 (1.4bn pcs p.a. with 5 lines), expected to be fully commissioned by end 2021, with first line to be operational by 1Q2021; ii) newly acquired 4.05 hectares of land in Meru (5bn pcs p.a. with 16 lines) to be completed in 2 phases with full commission expected by 1H2022; and iii) first Bidor plant (4bn pcs p.a. with 12 lines) is on track to be fully commissioned in 2H2022. Overall, Kossan capacity for FY20/FY21/F22 is expected to be 32bn (+10.3%)/ 35.4bn (+10.6%)/ 42.4bn (+19.8%) pcs p.a. respectively.

Earnings revision.

The latest information gathered from recent engagement with Kossan’s representative prompted us to impute higher ASP and volume. As a result, we raised our FY20/FY21 earnings higher by 67%/100% to account for i) higher volume growth from additional capacity and ii) higher assumption of ASP increases in subsequent months. We now expect net profit margin to hold at 18.7%/20% in FY20/21 (+4.2ppts/ +5.8ppts from previous estimate).

Maintain BUY with TP RM20.00.

Maintain BUY with higher TP of RM20.00 from RM11.30 previously. Our valuation is based on lower PER of 30x (in-line with +1SD above 5-yrs historical forward mean) and pegged on supernormal FY21 EPS of 66.7 sen. Following the revision, Kossan is currently trading at about 27x of 12-mths rolling forward PE (chart 1), which we believe is not expensive, taking into account a phenomenal earnings expansion from unprecedented supplydemand dynamics owing to Covid-19.

Potential re-rating catalysts: i) higher than expected rise in ASPs from continued strong demand and tight supply and ii) faster than expected operation of new capacity production lines

Downside risks: i) faster discovery and mass production of effective Covid-19 vaccines than expected and ii) higher than expected raw material prices.

Source: BIMB Securities Research - 27 Jul 2020

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