Kossan’s 3QFY20 core PATMI of RM354.1m (+141% QoQ, +631% YoY) brought the 9MFY20 amount to RM551.6m (+240% YoY). The results came in above both ours and consensus expectations due to higher earnings expectations in 4Q mainly driven by stronger ASPs. YTD showed improvement due to higher ASPs (+16%) and sales volume (+20%). We raise our FY20-22 forecasts by +34%/+19%/+27% respectively to account for higher ASPs moving forward. Our TP rises to RM9.56 (from RM9.15 – post bonus issue). Our TP is based on FY21 earnings pegged to PE multiple 22x (average 5 year mean). Maintain BUY.

Above expectations. 3QFY20 core PATMI of RM354.1m (+141% QoQ, +631% YoY) brought the 9MFY20 amount to RM551.6m (+240% YoY), accounting for 74% of both ours and consensus estimates. We deem the results to be above expectations due to higher earnings expectations in 4Q mainly driven by improving ASPs.

Dividend. Declared dividend of 3.0 sen per share going ex on 24 Nov 2020.

QoQ. Revenue was lifted to RM1.03bn (+47.3% QoQ) on the back of higher ASPs (+40%) and volume (+9%). EBITDA increased to RM466m (+147% QoQ) whilst EBITDA margins was up by 18.2ppts to 45.1% (from 26.9%) despite the rise in raw material costs (NBR: +14%, NR: +7%). Following that, core PATMI jumped to RM354.1m (+141%). All 3 divisions showed improvements; (i) Gloves (PBT: +177%), TRPs (PBT: +542%) and Cleanroom (PBT: +18.9%). Improvements were generally due higher demand driven by the Covid-19 impact; TRPs division showed the highest improvement due to the resumption of full operations from lockdown under MCO and the rebound in deliveries in the infrastructure segment.

YoY. Revenue grew (+94.5%) thanks to improved ASPs (+45%) and volume (+35%). EBITDA margin rose 28.7ppts despite raw material costs increasing slightly (c.4%). Core PATMI surged by +631%. All 3 divisions performed well; Gloves (PBT: +670%), TRPs (PBT: +19.4%) and Cleanroom (PBT: +1131%).

YTD. Revenue rose to RM2.35bn (+42.8% YoY) due to higher ASPs (+16%) and volume (+20%). EBITDA increased to RM765.5m (+168% YoY) whilst EBITDA margins improved by 15.2ppts to 32.6% with marginally lower raw material costs (NBR: -7%, NR: -1%). Core PATMI was lifted to RM551.6m (+240% YoY). The improved performance was led by the Gloves (PBT: +250%) and Cleanroom (PBT: +913%) divisions. TRPs division fell (PBT: -34.4%) due to MCO which disrupted operations.

Outlook. Plant 19 (10 lines; 3bn pieces) has been fully commissioned in Aug 2020. Plant 20 (5 lines; 1.5bn pieces) is on track to begin commissioning in 1Q21 and is expected to be fully operational by 1H21. Currently, volumes are being fully taken up till end FY21. We expect 4Q to be much better, with more significant price adjustments and higher spot orders. Current spot orders accounts for c.13% (vs.10% in 2Q) of total volume; the incoming capacity will be focused to supplying them.

Forecast. We increase our FY20-22 forecasts by +34%/+19%/+27% respectively to account for higher ASPs.

Maintain BUY, TP: RM9.56. Post earnings adjustments, our TP increases to RM9.56 (from RM9.15 – post bonus issue). Our TP is based on FY21 earnings pegged to PE multiple 22x (average 5 year mean). Maintain BUY.

Source: Hong Leong Investment Bank Research - 16 Nov 2020