• Kossan held a briefing on 15th Dec to provide an update on 427 positive Covid-19 cases among workers at their glove division.
• The company has voluntarily stopped operations in the affected areas, which represent c.25% of total output. Impact of closure for 2 weeks is minimal at about 2% of our FY20 earnings forecast.
• We make no adjustment to our forecast. Additionally, ASP is expected to increase at least until 1HFY21.
• Reduced our TP to RM5.20, implying PER of 18x (5 years historical forward PE) and rolled over valuation to FY22 EPS to reflect a normalised long-term earnings growth and sentiment on vaccine progress. Downgrade to HOLD.

Kossan Covid-19 cases

Kossan has voluntarily conducted Covid-19 testing for its glove division in phases from 4-10th Dec with a total of about 7k workers. Out of all 6 locations tested, only 1 location has been identified with positive Covid19 cases involving 427 workers (local 8, foreigner 419).

Action taken by Kossan

Kossan has taken actions by stopping operations on 7 Dec in the affected areas, performed a thorough disinfection and placed workers that have direct contact under quarantine for 14 days. Apart from this, Kossan will conduct a second PCR test on 1,667 employees under quarantine on 16th or 17th Dec before being permitted to work again if confirmed healthy. Additionally, in order to further enhance the effectiveness and make sure everything is under control, the company is looking into implementing a random test sampling for their workers every 2 weeks.

Minimal impact on earnings

The closure of affected areas constitutes about 25% of total output. On the assumption of 2 weeks production closure and quarantine period, impact would be minimal at c.2% to our FY20f earnings.

Long-term demand outlook still promising

Earnings growth is expected to remain strong in the next few quarters on the back of increase in ASP at least until 1H21 before gradually declining, in our view. Although ASP is unlikely to sustain at current levels in 2022, we still believe that long-term gloves demand remains promising at above pre-Covid level of 8-10% as the industry continues to benefit from a structural change in higher gloves usage due to greater hygiene awareness.

Maintain BUY, TP RM5.20

No changes to our earnings forecasts. However, we reduced our TP to RM5.20 (from RM10.00), implying PER of 18x (inline with 5-yrs historical forward PE or 10% discount to sector PE of 20x) and rolled over to FY22 valuation to reflect a normalised long-term earnings growth as it moves past peak Covid-19 period, ie FY21 and sentiment on vaccine progress. We believe the stock is now fully-valued and downgrade to HOLD.

Source: BIMB Securities Research - 16 Dec 2020