Kossan’s 1QFY21 core PATAMI of RM1,063.3m (+117.3% QoQ, ~19x YoY) was above both ours and consensus expectations at 38.1% and 46.8% of full year forecasts respectively. While one of Kossan’s peers have reported a slight downtrend in nitrile glove ASPs recently, we note that Kossan’s ASPs had previously lagged behind. As such, we do not expect Kossan’s ASPs to decline just yet. Pending Kossan’s earnings briefing later today, we keep our foreca sts, BUY call and TP of RM5.22 unchanged.

Above expectations. 1QFY21 core PATAMI of RM1,063.3m (+117.3% QoQ, ~19x YoY) was above both ours and consensus expectations at 38.1% and 46.8% of full year forecasts respectively. Better than expected earnings was due to higher than expected ASP. Core PATAMI was arrived at after adjusting for EI amounting to RM21.5m from forex gains (RM28.5m) and donations towards efforts against Covid-19 (RM50m).

Dividend. Declared 12 sen DPS goes ex on 6 May 2021. 1Q20 DPS: None declared.

QoQ. Revenue rose +67.7% due to higher disposable glove sales volumes and ASPs. Note that sales volume in 4Q20 was dampened by disruptions in operations due to Covid-19 outbreak in Kossan’s production facilities. Core PATAMI more than doubled (+117.3%) to RM1,063.3m in tandem with better glove sales.

YoY. Sales spiked +258.5% to RM2,192.1m, a record high for the group, due to significantly higher disposable glove ASPs and sales volume from voracious demand, from the Covid-19 pandemic. Core PATAMI of RM1,063.3m represented a ~19x increase YoY in tandem with higher sales.

Outlook. Going forward, we expect Kossan to continue capitalizing on the ongoing shortage of global glove supply by adding circa 3.5bn pieces capacity in FY21. In turn, we expect sales volume to be higher YoY in FY21. While one of Kossan’s peers have reported a slight downtrend in nitrile glove ASPs recently, we note that Kossan’s ASPs had previously lagged behind significantly. As such, we do not expect Kossan’s ASPs to decline until 3Q at the very earliest. We expect to get further clarity on this at Kossan’s briefing later today.

Forecast. We keep our forecasts unchanged pending guidance from management at their results briefing later today.

Maintain BUY, TP: RM5.22. We keep our BUY call and TP of RM5.22 unchanged pending ASP guidance from Kossan. We value Kossan using with their pre-pandemic 5-year average PE multiple of 24x (CY15-19) based on sustainable earnings in a post super normal earnings environment (FY23) summed with free cash flows (both discounted back to PV) generated during the boom period.

Source: Hong Leong Investment Bank Research - 21 Apr 2021