Investment Highlights

• We maintain our HOLD recommendation on Kossan Rubber Industries (Kossan) with a lower fair value (FV) of RM5.40 (from RM7.07). We raise our FY21 net profit forecasts by 46% by imputing higher average selling prices (ASPs). We increase our ASP assumption to US$40/1,000 pieces from US$34/1,000 pcs. However, we cut FY22 earnings by 23% with ASP assumption reduced to US$29/1,000 pcs from US$30/1,000 pcs. We make no changes to our FY20 numbers.
• Kossan closed some of its production facilities in Klang for 2 weeks starting 4 December 2020. Over 7,000 workers (6 locations) have been tested for Covid-19 with 427 workers in 1 of the 6 locations found to be positive. Operations have been temporarily stopped for sanitisation. Management said that 1,667 workers are scheduled for testing for the second time in 16–17 December; and will resume operation if the results are negative.
• Kossan’s capacity has been fully taken up until the end of 2021 while still receiving orders for 2022. Around 10%–15% of its total capacity have been allocated for spot orders. Management indicated that incoming capacity will be directed to short-term orders.
• To recap, Kossan’s 10 production lines in Plant 19 have been fully commissioned in August 2020 with additional capacity of 3bil pcs per annum. Meanwhile, 5 lines with an annual capacity of 1.5bil pcs of Plant 20 will begin commissioning in 1QFY21 and expect to be fully commissioned by 1HFY21. This will bring Kossan’s total capacity to 33.5bil pcs/year.
• Kossan indicated that ASP for the month of December 2020 to be around US$50–60/1,000 pcs with an upward trend. However, management guided that ASP will begin to decline after 2HFY21 with demand likely to soften given the availability of vaccines next year. As such, we raise our FY21 net profit forecasts by 46%, imputing higher average selling prices (ASPs). Hence we increase our ASP assumption to US$40/1,000 pcs from US$34/1,000 pcs.
• 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. Our FV of RM5.40 is based on 27x (5- year average) FY PER over FY22 EPS.

Source: AmInvest Research - 16 Dec 2020