Kossan’s 2QFY20 core PATMI of RM146.9m (+190% QoQ, +164% YoY) brought 1HFY20 amount to RM197.6m (+73.6% YoY). We deem the results to be within expectations as we expect stronger contribution in 2H driven by higher demand and ASPs. YTD, revenue increased (+18.1% YoY) thanks to higher sales volume (+14%) and ASPs (+1%). Kossan has proposed a 1 for 1 bonus issue of 1.28bn new shares, expected to be completed by 4Q20. We keep our forecasts as we expect better earnings contributions in 2H. Maintain BUY with unchanged TP of RM17.75. Our TP is based on FY21 earnings pegged to PE multiple of 31x (+2SD above 5-year mean).

Within expectations. 2QFY20 core PATMI of RM146.9m (+190% QoQ, +164% YoY) brought the 1HFY20 amount to RM197.6m (+73.6% YoY), accounting for 35% of ours and 30% of consensus estimates. We deem the results within expectations as we expect stronger contribution in 2H driven by higher demand and ASPs.

Dividend. No Dividend Was Declared.

QoQ. Revenue rose to RM701.7m (+14.8% QoQ) due to better volume sales volume (+6%) and ASP (+4%). EBITDA increased to RM189.0m (+71.2% QoQ) whilst EBITDA margins grew by 8.8ppts to 26.9%, along with lower raw materials prices (c.-2%). Following that, core PATMI increased to RM146.9m (+190% QoQ). Gloves and Cleanroom division showed improved performance (PBT: +95.3% and +>300% respectively) mostly thanks to increasing demand received due to Covid-19. Meanwhile TRPs division fell (-56.1%), impacted by MCO which disrupted the operations.

YoY. Revenue improved (+27.5% YoY) on the back of higher sales volume (+21.1%) and ASP (+2%). EBITDA margin improved slightly (9.4ppts) with lower raw material prices (NBR: -11%, NR: -10%). Accordingly, core PATMI increased by +163.6%. Due to higher demand received, both Gloves and Cleanroom division performed better (PBT: +143% and +>500% respectively). However, TRPs division operations were affected (PBT: -79.6%) due to MCO.

YTD. Revenue rose to RM1,313.1m (+18.1% YoY) due to higher sales volume (+14%) and ASPs (+1%). EBITDA increased to RM299.5m (+50.6% YoY) whilst EBITDA margins improved by 4.9ppts to 22.8% along with lower raw materials (NBR: -11%, NR: -3%). Core PATMI surged to RM197.6m (+73.6% YoY). Both Gloves and Cleanroom division showed improvement (PBT: +75.4% and +>500%), this was mainly attributed to stronger demand received due to Covid-19 pandemic. TRPs division fell (PBT: - 65.1%), impacted by MCO which disrupted their operations.

Bonus issue. Kossan has proposed a 1 for 1 bonus issue of 1.28bn new shares. As at 21 Aug 2020, being the latest practicable date (LPD), the issued share capital of Kossan is RM323m comprising of 1.28bn shares. The proposed bonus issue is expected to be completed by 4Q20. This should augur well for sentiment, especially amongst retail investors.

Outlook. Plant 19 (10 lines; 3bn pieces) has been fully commissioned in 1H20. We expect the upcoming quarters to show a more significant price adjustment that would lead to margin expansion. Currently, volumes are being locked until at least 3Q21. Furthermore, spot orders accounts for 10% of total volume and incoming capacity will be focused to supplying them.

Forecast. Maintain forecasts, as we foresee better 2H. As we understand, 1H20 performance was only backed by a marginal increase in ASP, hence, we expect the upcoming quarters to see a more significant price adjustments that would lead to margin expansion.

Maintain BUY, TP: RM17.75. We maintain BUY with unchanged TP of RM17.75. Our TP is based on FY21 earnings pegged to PE multiple 31x (+2SD above 5 year mean)

Source: Hong Leong Investment Bank Research - 26 Aug 2020