Kossan’s net profit for 1QFY21 jumped by fifteen-fold, to a new record high of RM1.04bn. During the quarter, Kossan also made a RM50m contribution to the Malaysian government’s Covid-19 fund. The contribution is non-recurring in nature, stripping out the one-off contribution, Kossan’s core net profit would be RM1.09bn, up by 1585% YoY. Kossan’s stellar performance came in above both our and consensus estimates at 41% and 43% respectively. The discrepancy in our forecast was due to higher-than-expected revenue. However, we are keeping our forecasts unchanged, pending an analyst briefing. We maintain our Trading Buy call, with an unchanged target price of RM6.10. We reckon that the rising Covid-19 cases in multiple countries, including Malaysia, should help to lift sentiments on the glove sector in the near term. On a side note, Kossan has also declared an interim dividend of 12sen per share.

• Glove division still doing well. Kossan’s 1QFY21 revenue jumped by 259% YoY to RM2.19bn, mainly contributed by the strong growth in its glove division. Its glove division reported a revenue increase of 282% YoY, to RM2.09bn. We attribute the jump in revenue to higher ASPs and higher sales volume on a YoY basis, fueled by the Covid-19 pandemic. As for the Group’s headline net profit, Kossan registered a 1508% YoY growth, to RM1.04bn. Note that Kossan has also incurred a RM50m contribution to the Malaysian government’s Covid-19 fund. Removing the one-off impact, Kossan’s core net profit would be RM1.09bn, implying a 1585% YoY growth. The Group has previously guided that it expects ASP to further increase by 50% on a QoQ basis in 1QFY21 and we believe this has led to core net margin expansion of 39.2ppts to 49.8%.

• Technical Rubber Product Division. Kossan’s technical rubber products (TRP) division also showed improvements, recording 8.2% YoY growth, to RM41.5m. PBT, however, rose by 158.8% YoY, supported by higher deliveries and sales of higher margin products. Given the gradual uptick in economic activity and higher infrastructure spending both locally and regionally, the TRP division should stay profitable in FY21.

• Expansion. Expansion on the newly purchased Meru land is expected to be carried out in two phases. 1st Phase (6 lines, +2.0bn pcs pa) should begin commissioning in 2HCY21, while commissioning of the 2nd Phase (10 lines, +3bn pcs pa) is expected to be in 1HCY22.

Source: PublicInvest Research - 21 Apr 2021