• Overview. 2QFY20 net profit came in at a historical high of RM131m (+102% qoq, +135% yoy) mainly due to rise in sales volume (6% qoq, +21% yoy) and higher ASP (c.+5% qoq, +2% yoy). Nitrile rubber raw material prices fell c.1% qoq, c.10-12% yoy. Consequently, profit margin improved to 18.7% (+8.1ppts qoq, 8.5ppts yoy).

• Key highlights. Kossan sales volume have been locked-in until at least 3Q21. In catering to the growing demand, management recently revealed a new reconfigured additional expansion plan with a total installed capacity from current 32bn to 42.4bn (+33%) by end 2022. (refer table 3).

• Against estimates: Inline. 1HFY20 net profit of RM195.9m (+71% yoy), making up 28.8% and 29.6% of our and consensus forecast. We expect higher earnings in upcoming subsequent quarters on the back of significant higher ASP adjustments as mentioned in our company update report published in July.

• Outlook. Demand visibility from unabated, new waves and rapidly increasing global Covid-19 infections as well as higher ASPs (expect to peak in 2HCY2020) solidify our view for explosive earnings expansion over at least the next 3 quarters. Long-term demand post-Covid-19 is anticipated to remain higher >+c.12% p.a on greater hygiene awareness, as well as structural change in gloves usage globally in non-medical sectors.

• Our call. Maintain BUY with unchanged TP of RM20.00 based on 30x PER pegged on supernormal FY21 EPS of 66.7sen. Kossan is currently trading at approx 23.5x on 12-mths rolling forward PE (chart 1), which we believe is not expensive, taking into account the phenomenal earnings growth from unprecedented supply demand.

• Bonus issue. Proposing a 1:1 bonus share issue of 1,278.9m new shares at an entitlement date to be determined later. This will result an adjustment in FY20/FY21F EPS from 53.2sen/66.7sen to 26.6sen/33.4sen and theoretical TP ex-bonus will be RM10.00.

• Downside risk. i) Faster-than-expected discovery of safe, effective and mass production of vaccine for the global community which could stifle pricing competition and ii) higher than expected raw material prices.

Source: BIMB Securities Research - 25 Aug 2020