• Kossan held a 1QFY21 results briefing to sell-side analyst on 21st April. The stronger profit of RM1bn was mainly due to increase in sales volume (2-4% qoq, 8-10% yoy) and higher ASP (50-60% qoq, 120- 130% yoy).

• Kossan is confident of sustained strong demand with orders fully taken up until end-2021 and ASP to continue to increase in 2QFY21, closing the gap with the market leaders.

• Kossan declared 1st interim DPS of 12 sen and committed to declare more dividends. Our new total FYE21 DPS estimate is 44 sen, translating into a dividend yield of 11.2%.

• We revised our earnings forecast higher for FY21f/FY22f by 75%/38% as we increased our ASP and margin assumption.

• Maintain BUY call with TP of RM5.20, implying lower PER of 13x pegged to FY22 EPS.

Key takeaways from Kossan’s 1QFY21 results briefing

• To recap, 1QFY21 strong earnings of RM1bn (92% qoq, 1508% yoy) was mainly due to increase in volume (2-4% qoq, 8-10% yoy) and higher ASP (50-60% qoq, 120-130% yoy).

• Management is confident of sustained strong demand as capacity has been fully taken up until end-2021. Spot order accounts for 10-15% of total capacity.

• Kossan guided that their ASP is still on the rising trend, closing the gap with the market leader. 1QFY21 ASP is about US$80 with April ASP increasing to about US$90 and expected 2QFY21 ASP of about US$90- 95. No guidance for 2H, but overall we have taken a prudent approach expecting ASP to peak in 2QFY21 and start to see gradual decrease in 2HFY21.

• Expansion plan remains unchanged with capacity expected to increase to 35.5bn pcs (c.11%) in FY21 from Plant 20 (1.5bn) and Phase 1 Meru Plant (2bn). Bidor 1st Plant is currently targeted for commissioning in 2H2022 but could be pushed back to 2023 depending on status of global market supply and lessen the impact of any oversupply on the company.

• Capex estimate for FY21/FY22f is around RM250m/RM350m mostly for its plants expansion.

• First interim DPS of 12 sen was declared (30% payout of 1Q EPS), with ex-date on 6 May and payment on 20 May. Historically, the company has been paying 35-40% dividend payout. Management reiterated its commitment on dividends and said more will be declared. We estimate total DPS for FYE21 of 44 sen based on payout of 35% on our new FY21f EPS. This translate into a dividend yield of 11.2%.

• Kossan is one of the earliest glove companies to fulfill its promise of donating RM50m to the Malaysian government for the country’s Covid-19 fund which was remitted in 1QFY21.

• On the issue of Kossan’s Covid-19 cases, the company stated that measures have been taken to overcome it and no major cases have arisen since then.

Demand rising amid new supplies

Going into 2QFY21, we expect Kossan to record another decent earnings performance due to increasing gloves volume and ASP. Moving forward, we believe ASP will see a gradual decline in 2H2021 as glove urgency expected to fade due to increasing percentage of global vaccinations and rising competition from existing and newcomers’ capacity which will mostly be up in 2H21 onwards. MARGMA estimate that new Malaysian entrants will add capacity between 6.5-10bn pcs p.a. in 2021. Nonetheless, we hold the view that long term glove demand post-Covid19 to remain stable due to increase hygiene awareness and structural changes in glove usage.

Earnings revision

Due to the better-than-expected results, we revised our earnings forecast higher for FY21f/FY22f by 75%/38% as we increased our ASP and margin assumption. Our new forecast has factored in ASP to decline by c.43% yoy in FY22 from its highest in FY21, which resulted in the decline in earnings for FY22. Overall, our blended ASP estimate for FY21f/22f now stand at US$62/US$35 per 1k pcs of gloves.

Maintain BUY with TP RM5.20

Our TP of RM5.20 is based on FY22f EPS pegged to lower of PER 13x (-1SD of 5 yrs pre-covid19 historical forward mean), as uncertainties prevail in ASP trend and price adjustment beyond 2021. However, with the correction in share price (60% decline from its peak), we reiterate BUY call on Kossan. The stock valuation remains attractive trading at PER of 3.1x FY21F and 9.8x FY22F.

Source: BIMB Securities Research - 22 Apr 2021