Investment Highlights

• We maintain our BUY recommendation on Kossan Rubber Industries (Kossan) with a higher fair value of RM15.74. Our valuation is based on a P/E of 27x FY21F EPS.
   
• We raise our earnings forecasts by 7% for FY20F, 26% for FY21F and 22% for FY22F. This is to account for higher assumptions of average selling price (ASP) and sales volume. We increase our assumption for ASP to US$29 (previously US$28) in FY20F and FY21F. We also raise our assumption for sales volume by 5% for FY21F and 14% for FY22F.
   
• Key highlights of the conference call with Kossan are:

1. Kossan is seeing improved demand and the company has started to receive orders for 2H2021. ASP has shot up 20% in July 2020 and the group expects a 40% jump in August 2020 compared with 2QFY20E’s ASP. Kossan expects ASP to continue to grow for the rest of the year.
    
2. Kossan has firmed up its capacity expansion plans for the upcoming years. The group will be adding a new factory, adjacent to its existing Plant 18 and Plant 19. The new plant will consist of 5 new lines with a total capacity of 1.4bil pieces per annum (+4%). This new plant is expected to be completed in 1HFY21, with its first line to be operational by 1QFY21.
    
3. Kossan will also add 16 more lines, to be set up on the newly purchased land in Meru, Klang. The group expects 6 of the lines to be completed in 2HFY21F while the rest will be done in 1HFY22F. This will add another 5bil pieces (+15%) of capacity for the group.
    
4. In Bidor, Kossan expects 12 lines to be completed by 2HFY22F. This plant will add on 4bil pieces per annum (+10%). 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%).
    
5. We are positive on this development as we think that the timing of the new expansion plan, especially in 1HFY21F, augurs well for the group as it will allow Kossan to benefit from the heightened demand for rubber gloves. The expansion plans will also continue to drive the group’s earnings growth.
    
6. We like Kossan for its position as one of the biggest glove producers to benefit from the Covid-19 pandemic, its expansionary plans and its efforts in improving quality and operational efficiency as well as increasing automation. In the long term, we anticipate further improvements in Kossan’s performance on the back of better operating efficiency.

Source: AmInvest Research - 27 Jul 2020