• Kossan halted its glove operations in Selangor in compliance with the EMCO order as glove manufacturing is not considered as essential service.

• We reduced our FY21f earnings by c.7% to reflect the disruption in production for 2 weeks and lower utilisation rate due to longer-than-expected National Recovery Plan Phase 1.

• Maintain BUY but lower TP of RM3.40 pegged at PER 15x and rolling over valuation to CY23F EPS to reflect the normalized earnings.

Gloves not considered as essential services during current EMCO

Kossan has implemented temporary stoppage of its glove manufacturing facilities in Klang. It is to note that most of Kossan production facilities are in Selangor and currently under EMCO until 16th July. Based on our estimates, FY21 Kossan’s earnings will be impacted by c.4% every 2 weeks of shutdown of its operations.

Glove ASP likely to have peaked in 2QFY21

The production shut down for 2 weeks will likely slow the slide in gloves’ price but we believe its ASPs have already peaked in 2QFY21. We reiterate our opinion that Kossan’s ASP will gradually decline in 2HFY21 onwards as glove buying urgency is anticipated to fade due to increasing percentage of global vaccinations and rising competition globally from existing & newcomers capacity. Long-term gloves consumption remains solid on the back of structural change in higher glove usage due to greater hygiene awareness.

Maintain BUY, new TP RM3.40

We cut our FY21 earnings by 7% to reflect the disruption in production for 2 weeks and lower utilisation rate due to longer than expected National Recovery Plan Phase 1 (operate at 60% workforce capacity). Hence, we have derived a lower TP of RM3.40 (from RM5.20), pegged at PER 15x (Kossan’s 10-years historical forward average) and rolling over valuation to CY23F EPS to reflect the normalized earnings moving forward. Maintain BUY as we believe valuation currently has already factored in future weaker earnings whilst FY21/FY22 dividend yield remains attractive at 13.8%/4.7% respectively.

Source: BIMB Securities Research - 8 Jul 2021