• Overview. Kossan’s 2QFY21 revenue increased to RM2.2bn (+219% yoy), while net profit jumped to RM1.1bn (713% yoy) mainly due to higher ASP (>250% yoy) and sales volume (1% yoy). On qoq basis, net profit improved by 2.2% mainly contributed by higher ASP (c.5-7% qoq), mitigating the decline in sales volume (c.2-4% qoq) partially due to lower production volumes during National Recovery Plan Phase 1 (NRP1), in our view.

• Key highlights. We believe Kossan’s earnings have peaked during this quarter and the upcoming 3QFY21 results are expected to be weaker qoq due to lower utilisation rate caused by NRP1 and suspension of manufacturing during EMCO as well as declining ASP.

• Against estimates: Inline. 1HFY21 net profit of RM2.1bn, making up 70% and 64% of our and consensus full year forecast. We deem our forecast within expectations, as we are expecting lower 2HFY21 earnings performance.

• Dividend. Second interim DPS of 12 sen was declared, bringing YTD DPS declared of 24 sen (c.29% payout of 1HFY21 EPS). We estimate total FYE21 DPS of 41.3 sen, translating into DY of 12.5%.

• Outlook. Increase current glove demand from restocking activities on rising Delta variant cases worldwide, is expected to temporarily slow the fall in glove ASP for now. Nevertheless, we feel that the overall market’s ASP have already peaked in 1HCY21. We reiterate our opinion that moving forward Kossan’s ASP will gradually decline in 2HFY21 onwards as glove buying urgency is anticipated to fade due to higher global vaccinations rate and rising competition globally from increasing capacity by both existing & new players. Our ASP assumptions for FY21/FY22/FY23 stand at USD65/35/30 per 1k pcs.

• Our call. We maintain our forecast and TP of RM3.40, implying a PER of 15x (Kossan’s 10-years historical forward average) pegged on CY23F EPS to reflect the normalized earnings moving forward. We downgrade our recommendation on Kossan to Hold, given the limited upside.

Source: BIMB Securities Research - 28 Jul 2021