• Overview. 1QFY20 net profit increased to RM64.8m (+6.2% qoq, +10.4% yoy) mainly due to rise in sales volume (8.3% qoq, 7.4% yoy) and higher ASP (0.5% qoq, 2% yoy). Nitrile rubber raw material prices fell c.8% qoq, c.12% yoy. Consequently, EBITDA margin improved to 18.3% (+1.3 ppts qoq).

• Key highlights. Kossan current utilization rate is at c.90% and order lead time increased to 9 months (vs 2-3 months normally). Kossan factory F19 (10 lines, 3bn pcs p.a.) currently has 8 lines operational and expect full commissioning by June. Upon full completion of F19, Kossan installed capacity will increase to 32bn pcs p.a (table 3).

• Against estimates: Inline. 1QFY20 net profit was inline with our and consensus forecast at 24% and 23% respectively.

• Outlook. A prolonged Covid-19 outbreak and concerns on virus resurgence as well as longer time taken for mass production of vaccine create impetus for greater restocking activities. Demand has been rising significantly since April, causing a supply shortage and driving prices higher. Kossan has seen ASP increased about c.4-5% recently and expect higher ASP in 2HFY20. As such, we raised our earnings forecast for FY20/21 by 26%/26% respectively as we increased sales and imputing higher ASP c.7%. We now expect profit margin to hold at 12.6% in FY20.

• Our call. Maintain BUY with new TP of RM10.00 (from RM6.60) based on higher PER of 34x (which is c.10% discount to our glove sector forward PER) and pegged on revised FY21 EPS. We continue to like Kossan due to its strong prospect on the back of surge in demand from restocking activities and greater increase in ASP, hence expecting higher earnings growth of 51% yoy in FY20. Kossan currently trades at 30x our forward PER, of which the valuation looks more attractive compared to its peers Hartalega and Top Glove trading at our forward PER circa 53x and 36x respectively.

• Upside risk. Stronger than expected increase in ASP and sudden weakness in MYR.

Source: BIMB Securities Research - 22 May 2020