Investment Highlights

• We maintain BUY on Kossan Rubber Industries (Kossan) with a higher FV of RM9.72. Our valuation is based on a P/E of 27x FY21F EPS.

• We raise our earnings forecasts by 62% for FY20F, 62% for FY21F and 9% for FY22F. This is to account for higher average selling price (ASP) and sales volume. We increase our assumptions for ASP by 15% and for sales volume by 6% for FY20F–FY22F.

• Kossan’s 1QFY20 core PATAMI of RM64.2mil (+9% YoY; - 1% QoQ) which made up 21% of ours and 23% of street’s full-year earnings forecasts, was in line with expectations.

• Kossan’s 1QFY20 revenue grew 9% YoY (+6% QoQ) to RM611.5mil while PBT margin was flat 13.5% (+0.1ppt YoY; +1.0ppt QoQ) (see segmental breakdown in Exhibit 1).

• The glove division’s revenue climbed 10% YoY (+7% QoQ) to RM548.2mil and recorded a PBT margin of 14% (+0.4ppt YoY; +1.2ppt QoQ) on the back of strong demand growth from the Covid-19 pandemic. Sales volume rose 7.4% YoY (+8.3% QoQ).

• Glove average selling prices increased 1–2% YoY (grew less than 0.5% QoQ). Price of nitrile material was higher by 5–7% YoY (+1–3% QoQ) while latex material price dropped 10–12% YoY (6–8% QoQ).

• The technical rubber product (TRP) division experienced lower sales deliveries in 1QFY20 which resulted in an 18% YoY (-15% QoQ) decline in revenue to RM38.4mil and 49% YoY (29% QoQ) drop in PBT to RM82.5mil.

• PBT margin was 9% as it slid 6ppt YoY (2ppt QoQ). We believe this was because of a drop in demand as infrastructure projects were halted due to the Covid-19 pandemic as well as less demand from the automotive segment.

• Glove demand arising from Covid-19 began to jump from April onwards. This resulted in a supply constraint and subsequently drove selling prices higher. Kossan has received orders close to 10 months ahead of delivery with prices to be finalized 1–2 months prior to delivery.

• We like Kossan for its expansionary plans and efforts in improving quality and operational efficiency as well as increasing automation. Moving forward, we expect a stronger performance for the year due to the increased demand from Covid-19 pandemic further buoyed by its expansion plans.

Source: AmInvest Research - 22 May 2020