Investment Highlights

• We maintain our HOLD recommendation on Kossan Rubber Industries (Kossan) with an unchanged fair value of RM3.65 based on a PER of 18x FY22F EPS. There is no ESG-related adjustment based on our 3-star rating.

• We raise our FY21F net profit forecast by 15% as we increase our average selling price (ASP) assumption to US$54/1,000 pcs from US$47/1,000 pcs. We had previously underestimated the quantum of price increases in 1HFY21.

• We also revise our operating expenses to consider the effects of higher natural latex and NPR costs (Exhibit 1), as well as higher taxation expenses for the year. Our forecasts for FY22F and FY23F remain unchanged. We have assumed an ASP of US$27/1,000 pcs for these periods. We performed a sensitivity analysis on our earnings (Exhibit 2).

• We reckon that Kossan’s ASP will peak in 2QFY21. This is in light of a resurgence in global Covid-19 cases and Kossan’s slower hike in ASPs as compared to its peers, which we believe have already hit their price ceilings in 1QFY21.

• However, there is a reduction in delivery lead time, signalling lower glove urgency, which may start affecting prices in 3QFY21. Additionally, there is a strong possibility that global Covid-19 cases will start declining in 3QFY21.

• Main takeaways from the results briefing yesterday include:

1. ASP guidance:

• 1QFY21: US$80–83/1,000 pcs. March prices nearly hit US$90/1,000 pcs.

• 2QFY21: US$90–100/1,000 pcs. As an indicator, April prices have already exceeded March’s values.

• 3QFY21: Uncertain. Kossan believes that glove prices could go either way.

• 4QFY21: Kossan expects glove prices to fall.

• Glove pricing is mostly uniform across all regions currently.

Source: AmInvest Research - 22 Apr 2021