Investment Highlights

• We maintain our HOLD recommendation on Kossan Rubber Industries (Kossan) with an unchanged fair value of RM15.74. Our valuation is based on a P/E of 27x FY21F EPS.

• Kossan’s 1HFY20 core PATAMI of RM211.7mil (+88% YoY) made up 32% of our and street’s full-year earnings estimates. We deem this to be in line with expectations as we expect much stronger earnings in 2HFY20 resulting from a gradual increase in average selling prices (ASP).

• Kossan’s 1HFY20 revenue grew 18% YoY to RM1,313mil while PBT margin expanded 6ppt YoY to 19% (see segmental breakdown in Exhibit 1).

• The glove division’s 1HFY20 revenue climbed 21% YoY to RM1,179mil on the back of strong demand growth from the Covid-19 pandemic. Sales volume rose 14% YoY. Glove ASP increased marginally by 1–2% YoY. Nitrile material’s price was lower by 10–12% YoY while that of latex dropped 2–4% YoY.

• As a result, the glove division’s PBT grew 75% YoY to RM228mil. PBT margin was higher at 19%, up 6ppt.

• The technical rubber product (TRP) division experienced lower sales deliveries in 1HFY20 which resulted in a 29% YoY decline in revenue to RM64mil and a 65% drop in PBT to RM5mil. PBT margin was 7.8% as it slid 8ppt. This was attributed to the impact of the movement control order (MCO) and the slowdown in the infrastructure and automotive industries due to the Covid-19 pandemic.

• Moving forward, the group is expecting a significant price adjustment and margin expansion for its glove division in subsequent quarters on the back of demand driven by the Covid-19 pandemic.

• Sales volume should also continue to be robust as demand is expected to grow by 20% to 330bil pieces in 2020, according to Malaysian Rubber Glove Manufacturers Association (Margma).

• The group’s performance will be further buoyed by its expansion plans. The group is expected to have a capacity of roughly 35.4bil in FY21F (+10%) and 42.4bil in FY22F (+20%).

• We believe Kossan’s TRP division will also improve in the subsequent quarters as the division has resumed full operations following the ease of lockdown measures.

Source: AmInvest Research - 26 Aug 2020