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