Investment Highlights

• We maintain our HOLD recommendation on Kossan Rubber Industries (Kossan). We fine-tune our fair value (FV) to a higher RM3.65 (vs. RM3.60 previously) based on an unchanged PER of 18x FY22F EPS. We have raised Kossan’s FY22F net profit by 2% to account for a weaker USD/MYR assumption. There is no ESG-related price adjustment based on our rating of 3 stars.

• Kossan’s 1QFY21 core net earnings of RM1.1bil was above our and street’s expectations, accounting for 63% and 43% of full-year forecasts respectively. The strong performance was attributed to the higher-than-expected glove average selling prices (ASP), which we believe may have risen by >55% QoQ in 1QFY21.

• We raise our FY21F core net profit forecast by 38% as we increase our average selling price (ASP) assumption to US$47/1,000 pcs from US$45/1,000 pcs, as well as revising our average cost of natural gas to RM25.00/MMBtu from RM34.80b/MMBtu, in line with the new prices stipulated by Gas Malaysia.

• We also tweak our FY22F and FY23F core net profit forecasts upwards by 2% and 1% respectively. We are raising our average USD/MYR exchange rate forecast to US$1.00:RM4.00 from US$1.00:RM3.98 for both years.

• Going forward, we believe that glove ASPs will see a decline in 2HFY21. Glove urgency is expected to wane as global Covid-19 vaccination measures start to take effect. However, the demand for gloves will likely remain stable post-Covid-19 following the wider adoption of gloves in developing countries.

• Revenue rose by 68% QoQ to RM2.2bil in 1QFY21. The glove division’s 1QFY21 revenue surged by 73% QoQ to RM2.1bil. This was due to higher glove ASPs and production volumes as there were fewer factory closures in 1QFY21 compared to 4QFY20.

• The group’s EBIT margin rose by 3.5 ppts QoQ to 62.4% in 1QFY21, which we attribute to reduced natural gas tariffs. Natural latex and butadiene (a core component of nitrile rubber) prices are still volatile.

• The group’s technical rubber and clean-room divisions also saw a marked amount of growth, with PBT climbing to RM8.9mil and RM11.5mil, a 58% and 520% YoY increase respectively. On a QoQ basis, it rose by 16% and 6% respectively.

Source: AmInvest Research - 21 Apr 2021