We came away Kossan’s briefing feeling positive over its near-term prospects, as we understand that the demand for gloves remains robust, with its capacities being fully sold until end of FY21. Moving into 2QFY21F, ASPs are also expected to continue rising, to c.USD95 per thousand pieces for normal orders, while spot order prices will be c.USD120 per thousand pieces. We also reckon that Kossan could potentially declare higher dividend payouts in the subsequent quarters, as its payout has historically exceed its dividend policy of 30%. We raise our earnings forecast for FY21F by 83.5%, mainly to accommodate the expected ASP increase, while our FY22-23F forecasts are kept unchanged. We maintain our Trading Buy call, with an unchanged TP of RM6.10.

• Supported by the conducive environment. After delivering a record breaking profit of RM1.04bn in 1QFY21, supported by strong ASPs and high sales volume, we expect Kossan to deliver an even stronger set of results in 2QFY21, as management have guided that ASPs will be raised further in 2QFY21, to c.USD95 level for per thousand pieces of gloves. Glove demand also continues to remain robust, as its capacities have been fully sold until end of FY21. We understand that 10-15% of its capacities are allocated for spot orders and are priced at a premium compared to its normal orders at c.USD120 per thousand pieces.

• Nitrile prices. Nitrile butadiene rubber prices are still considered relatively high currently, at almost double of its pre-Covid levels, given the strong demand. However, we understand the tight supply has eased slightly and prices are now stabilizing, which bodes well for glove makers like Kossan. Earlier, Kossan guided that it has secured sufficient raw material supply for its FY21 production.

• Expansion. Kossan’s expansion plan remains intact and Plant 20 (5 lines, +1.5bn pcs pa) is still under commissioning currently, with completion targeted in early 3QFY21. Expansion on the 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.

• Potential dividends. Kossan has recently declared a dividend of 12sen per share, representing a dividend payout of 30%. Though the payout was in line with its dividend policy of 30%, however, we are of the view that Kossan could potentially declare higher payouts in the subsequent quarters, as the Group’s dividend payout has historically been higher than its payout policy. Our forecast assumes a 38% payout for FY21F, which translates to 72.9sen per share, implying a dividend yield of 19%.

Source: PublicInvest Research - 22 Apr 2021