Investment Highlights

• We maintain our HOLD recommendation on Kossan Rubber Industries (Kossan) with a lower fair value of RM2.55 (vs. RM3.06 previously). This is based on PER of 17x FY23F EPS. There is no ESG-related adjustment based on our 3-star rating. However, we reduce our earnings estimates for FY22–FY23 after lowering our ASP for gloves.

• Kossan’s 9MFY21 net profit of RM2.63bil was in line with expectations. Although it made up 84% and 81% of consensus and our FY21 earnings estimates respectively, we expect a weaker 4QFY21 due to declining ASP trend. A dividend of 12.0 sen was announced. The ex-date is 8 Nov while the payment date is 19 Nov.

• 3QFY21 earnings tumbled 55% QoQ to RM496mil. The significant drop in earnings was due to lower ASP by 15%– 20%. Meanwhile, the volume of gloves sold shrank 25%–30% due to the implementation of the EMCO in Selangor which was followed by the National Recovery Plan (NRP).

• Gloves’ ASP is now in a downtrend. The company attributed this to the decline in serious Covid-19 cases worldwide. However, in the long term, Kossan believes that the post-pandemic demand will remain strong due to higher healthcare standards and hygiene awareness.

• We maintain FY21 earnings estimate as we retain our blended ASP of US$58.6. However, we cut FY22/FY23 earnings by 32%/26% to RM478mil/RM384mil. This is after taking into account new nitrile gloves' ASP assumptions of US$28.7/US$26.7 (vs. US$26.6/US$25.5) for FY22/FY23.

• We lower our fair value to RM2.55 from RM3.06 in line with the earnings reduction. We have raised our PE slightly to 17x from 15x. The 17x PE is the pre-pandemic average PE for Kossan.

• Maintain HOLD. The upside is capped as the ASP downtrend continues. We expect this to last till 4Q2021 but to end in early 2022. Having said that, the downside is also limited as its share price has fallen to below pre-pandemic level of RM2.45, which was last recorded on 31 Jan 2020. At that time, Covid- 19 has not spread to Malaysia and global daily cases were still low at less than 2,000 cases. Back then, ASP had not started its surge. As Kossan’s capacity has expanded with a much stronger balance sheet, we believe that our valuation of RM2.45 is fair as its fundamentals remain intact.

Source: AmInvest Research - 22 Oct 2021