We attended Kossan’s 1QFY21 earnings briefing and came away feeling positive on the group’s prospects going forward. Despite ASPs rising 50-60% QoQ in 1Q21, we expect ASPs to increase by another 8-10% QoQ in 2Q21. We raise our FY21/22/23 earnings forecasts by 10.9%/2.5%/5.3% to account for higher than expected disposable glove ASPs going forward. After adjusting for latest net cash figure and incorporating higher earnings forecasts, our TP rises from RM5.22 to RM5.60. Maintain BUY.

Below Are the Key Takeaways From Kossan’s 1Q21 Results Briefing.

Average Selling Price (ASP) outlook. To recap, Kossan’s ASPs increased by 50-60% QoQ in 1Q21. Kossan shared that despite the large increase in ASP, they expect this to grow even more in 2Q21 given that April ASPs have so far been higher than 1Q21. Overall, we expect 2Q21 ASP to be 8-10% higher QoQ. While one of Kossan’s peers have reported a slight downtrend in ASPs recently, Kossan reckons that this may be in part to selling to traders who offered higher prices, instead of actual medical product distributors, which resulted in unsustainable price levels. All in all, we reiterate our stance that we do not expect Kossan’s ASPs to decline until 3Q21 at the very earliest.

Volume outlook. In terms of volumes, Kossan’s sales volumes were 2-4% higher in 1Q21 QoQ due to spillover effect from Covid-19 disruptions on operations in 4Q20. Kossan shared that volumes in 2Q21 is expected to be even higher QoQ as 1Q21 still took time for operations to reach full capacity in Jan-21 when factories restarted operations. In totality, we expect higher volumes in FY21 YoY as Kossan shared that they are (i) on track to add 3.5bn pieces in annual capacity and (ii) capacity has been fully taken up until end-FY21.

Sales breakdown. We expect glove demand (and hence ASPs) to continue to be supported by Covid cases rebounding strongly globally, particularly in India (Figure #1- 2). While Kossan does not sell directly to India, they shared that there is little to no difference in ASPs to different regions. Currently, Kossan’s sales breakdown by geographic region is as follows: 45-50% America, 30-35% Europe, 15% Asia Pacific and 5% rest of the world.

Dividend. Recently declared DPS of 12 sen represented just 30% of 1Q21 earnings. Despite this, Kossan shared that they expect to pay out closer to 40% of full year FY21 earnings. Based on current share price, this would represent a dividend yield of 12.3% based on our FY21 forecasted net profit.

Forecast. We raise our FY21/22/23 earnings forecasts by 10.9%/2.5%/5.3% to account for higher than expected disposable glove ASPs going forward, as guided by management.

Maintain BUY, TP: RM5.60. After adjusting for latest net cash figure and incorporating higher earnings forecasts, our TP rises from RM5.22 to RM5.60. 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. At current levels, Kossan is trading at a PE of just 3.2x based on FY21 forecasted earnings. The resurgence of cases globally should be positive for sentiment on glove stocks. Maintain BUY.

Source: Hong Leong Investment Bank Research - 22 Apr 2021