Kossan’s 1Q20 core PATMI of RM50.7m (-24.9% QoQ, -12.8% YoY) came in at 15% of our expectations and 18% of consensus. We deemed it to be within expectations as we expect stronger contribution in 2Q20 and 2H20, supported by stronger demand and improving ASPs. Revenue improved YoY on the back of better sales volume and ASP, mainly from Gloves division. We maintain our forecasts, with expectations of better quarters ahead. We maintain our HOLD call with unchanged TP of RM8.11, based on FY21 earnings pegged to PE multiple 31.4x (+2SD).

Deemed within expectations. Kossan reported 1Q20 revenue of RM611.5m (+5.7% QoQ, +8.9% YoY) which brought core PATMI to RM50.7m (-24.9% QoQ, -12.8% YoY). The results accounted for 15% of ours and 18% of consensus estimates. We deemed it to be in within expectations as we expect better contribution from 2Q20 and 2H20 which will reflect the ASP’s revisions arising from the high global demand due to Covid 19.

Dividend. Declared second interim dividend of 3 sen per share going ex on 5 June, yielding at 0.3%.

QoQ. Revenue of RM611.5m saw an improvement (+5.7%) that was mainly aided by improved sales volume (+8.3%) and ASP (+0.5%). EBITDA increased to RM110.4m (+12.8%) whilst EBITDA margin increased slightly by 1.2ppts to 18.1% (from 16.9%). However, core PATMI fell to RM50.7m (-24.9%) due to increase in finance costs (+68.9%) and tax (+61.3%). Gloves division’s healthier performance (PBT: +16.8%; PBT margin: 14.1% from 12.7%) was backed up by higher volume sold (+8.3%) thanks to higher demand due to Covid-19 and with the shortage of supply driving up ASPs. TRPs division pulled back (PBT: -29.3%) due to lower sales deliveries and lower margin products; due to Covid-19, the demand for motor vehicles has dropped thus affecting automotive segment. However, TRP’s segment only constitutes less than 10% of Kossan’s revenue.

YoY. Revenue increased (+8.9%) thanks to improved sales volume (+7.4%) as well as increased ASP (+1.5%) while EBITDA margin remained flattish (-0.1%). Core PATMI decreased (-12.8%) due to increase in depreciation (+9.3%) and tax (+10.6%). Gloves division improved (PBT: +13.5%; PBT margin: 14.1% from 13.7%) mainly due to higher volume sold (+7.4%) but slightly offset by the increase in natural gas costs (+6.0%). On the other hand, TRPs division fell (PBT: -49.3%) attributed to lower sales deliveries and lower margin products, mainly due to Covid-19.

Outlook. Plant 19 (10 lines; 3.0bn pieces) has commissioned 6 lines with another 2 currently being commissioned. Full commissioning of 10 lines is expected to be by Jun 2020. We expect stronger demand of gloves as we comprehend that since Covid- 19, Kossan’s ASP has increased by c.4% while utilisation has increased to c.90% (from 80%). We believe that Kossan will be able to see higher ASP adjustments leading to margin expansion.

Forecast. We keep our forecasts as we foresee better 2Q20 and 2H20 to follow, which will reflect the ASP revision (c. 7%) in line with stronger demand due to Covid- 19 outbreak, and the subsequent supply shortage.

Maintain HOLD, TP: RM8.11. We maintain HOLD with unchanged TP of RM8.11. To recap we changed our valuations on all glove companies under our coverage to +2SD (from +1.5SD) in our Rubber Sector report (19 May); Kossan’s PE multiple was raised to 31.4x (from 27x), that increased our TP from RM5.00 to RM8.11. Our TP is based on FY21 EPS pegged to 31.4x PE (+2SD above 5-year mean).

Source: Hong Leong Investment Bank Research - 28 May 2020