• Overview. Kossan recorded the best ever performance with 1QFY21 revenue increasing to RM2.2bn (+68% qoq, +259% yoy), while net profit jumped to RM1bn (+92% qoq, +1508% yoy). We estimate this is mainly due to higher ASPs which rose >50% qoq. Overall, profit margin improved to 47.5% (+6 ppts qoq, +36.9 ppts yoy) on lower operating cost and better production efficiency.
• Key highlights. Previously, management guided that capacity has been fully taken up until end-2021 with ASP continued to increase, closing the price gap with the market leaders. On its expansion plan, total installed capacity will increase from current 32bn to 42.5bn (+33%) by end-2022 (table 3).
• Against estimates: Above. 1QFY21 net profit of RM1bn was above ours and consensus full year forecast, making up 56% and 43% respectively.
• Dividend. First interim DPS of 12 sen was declared (30% payout of 1Q EPS), with ex-date on 6 May and payment on 20 May. We estimate total DPS of 28.6 sen for FYE21, translating into DY of 7.5%.
• Outlook. We are expecting Kossan’s ASP to gradually decline from 2H2021 onwards due to increasing percentage of global vaccinations and rising competition especially from newcomers’ capacity which will mostly be up in 2H. MARGMA estimate that new Malaysian entrants will add capacity between 6.5-10bn pcs p.a. in 2021. Nonetheless, we hold the view that demand for gloves will remain stable post-Covid19 due to increase hygiene awareness and structural changes in glove usage. Additionally, resurgence of Covid-19 cases globally since mid-Feb could provide support for greater sales demand in the short term.
• BUY call. We maintain our forecast but with a potential upside to our earnings, pending further details from results briefing on 21st April. Our TP remain RM5.20, implying a PER of 18x pegged on FY22f EPS. Given upside of 37% based on our TP – coupled with a 60% decline in share price since its peak in Aug – we reiterate our BUY call on Kossan. Despite weaker market sentiment due to global vaccinations taking place, we believe the stock remains attractive trading at PER of 5.3x FY21F and 13.2x FY22F.

Source: BIMB Securities Research - 21 Apr 2021