Kossan Rubber Industries Berhad - Supported By ASP Hike

Date: 26/08/2020

Source  :  PUBLIC BANK
Stock  :  KOSSAN       Price Target  :  15.60      |      Price Call  :  HOLD
        Last Price  :  6.03      |      Upside/Downside  :  +9.57 (158.71%)

Kossan reported a 1HFY20 net profit of RM197.6m, up 70.9% YoY, in line with our but below consensus projections at 46% and 30% respectively. The strong performance was supported by the increase in sales volume as well as ASP hike that resulted in strong margin expansion. Considering the rather wide pricing gap between Kossan and the current market price, Kossan has guided steep ASP revision in July and August to narrow the gap. As such, we raise our earnings forecast for FY20-22F by 17-78% to account for the higher ASP. Our TP is subsequently raised to RM15.60. Reiterate Neutral.

  • Showing the impact of ASP hike. Kossan’s 2QFY20 net profit has registered 14.8% QoQ growth to RM701.7m, supported by a 6% QoQ growth in gloves’ sales volume, while ASP was up by 3-5% QoQ. The ASP hike was due to a global glove shortage in the market led by the pandemic. Lower raw material prices also bode well for the Group, whereby nitrile prices declined slightly by 1% QoQ while latex prices were down by 1-3% QoQ. As a result of the revised ASP and marginally lower raw material prices, Kossan’s PAT margin expanded by 8.1ppts to 22.9%, boosting its PAT by 102.2% QoQ to RM131.1m.
  • Expansion. All 10 lines in Plant 19 (+3bn pcs pa) has been fully commissioned in 2QFY20 and the next expansion, Plant 20 (+1.4bn pcs pa) is targeted to come on stream in 1HFY21. Both phases in Plant 21 will collectively add another 5bn pcs pa, expected to begin commissioning 2HFY21 and 1HFY22. Plant 22 (+4bn pcs pa), located in Bidor, will be operational by 2HFY22.
  • What is expected next? In the current reporting quarter, the ASP for gloves were only revised upwards by c.5% QoQ, leading to a huge pricing differential between Kossan and the prevailing market price. As such, Kossan hiked its ASP aggressively in the month of July (+20% vs 2QFY20) and August (+40% vs 2QFY20) to close the gap. Kossan have also locked in orders up until 3QFY21 while spot order makes up c.10% of its existing volume and are currently priced at USD60-85 per k pcs, approximately 3x of the price of recurring orders. We adjust our earnings projection for FY20- 22F by 17-78% to account for the expected steep ASP hike.
  • Bonus issue. Kossan has proposed a bonus issue, on the basis of 1 bonus share for every 1 existing share. Although there will be no impact on fundamentals, we still view this move positively as its shares will be nominally more affordable post-exercise and hence more appealing to investors. The exercise is targeted to complete by 4QCY20.

Source: PublicInvest Research - 26 Aug 2020

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Chart Stock Name Last Change Volume 
KOSSAN 6.03 +0.03 (0.50%) 6,780,900 

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