Kossan Rubber - Expecting ASP To Increase 25% QoQ in 3QFY20F

Date: 07/09/2020

Source  :  AmInvest
Stock  :  KOSSAN       Price Target  :  14.32      |      Price Call  :  HOLD
        Last Price  :  6.07      |      Upside/Downside  :  +8.25 (135.91%)

Investment Highlights

  • We maintain our HOLD call on Kossan Rubber Industries (Kossan) with a lower fair value of RM14.32 (RM15.74 previously). Our fair value is based on a lower P/E of 24x FY21F EPS (P/E of 27x previously).
  • We have lowered our P/E multiple to reflect the average 3- year forward P/E for the group as we think that the bump in earnings will end post-Covid-19 pandemic.
  • We have raised our earnings forecasts for Kossan by 8% for FY20F, 2% for FY21F and 1% for FY23F. We have also adjusted our average selling prices (ASP) upwards by 4% in FY20F to around US$30 and 2% in FY21F to US$30.
  • Key highlights of the conference call with Kossan last Friday are:
    • Kossan is seeing improved demand due to Covid-19 pandemic. The group expects its sales volume to grow roughly 10% QoQ in 3QFY20F and 5% QoQ in 4QFY20F. About 15% of orders in mid-2021 have been fixed. Some orders have been contracted for end-2021.
    • ASP has improved. The group expects roughly a 25% QoQ increase in 3QFY20 and 45% QoQ increase in 4QFY20.
    • The group’s spot order made up roughly 15% of sales volume but the group will gradually allocate more volume to cater to spot orders. The ASP for spot orders hovers around US$60–80 for every thousand pieces of gloves. The group collects around 30% of deposit for spot orders.
    • The group is expecting the technical rubber product (TRP) segment to remain profitable despite the drag from the automotive segment.
    • Expansion plans remain on track. The group is expected to have a capacity of roughly 32.0bil pieces in FY20F (+10%), 35.4bil in FY21F (+10%) and 42.4bil in FY22F (20%).
  • We like Kossan as it is one of the biggest glove producers to benefit from the Covid-19 pandemic due to its expansionary plans and efforts in improving quality and operational efficiency.
  • In the long term, we anticipate further improvements in Kossan’s operating efficiency. However, we think that the company is fairly valued based on the current PE of 23x (3-year average forward PE is 24x).

Source: AmInvest Research - 7 Sept 2020

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KOSSAN 6.07 -0.18 (2.88%) 3,362,300 

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