Kossan’s 1H21 core PATAMI of RM2,093.7m (~10.6x YTD) was above our expectations but in line with peers accounting for 80.4% and 63.4% respectively. After the surprise in 2Q21 earnings, we increase our FY21 forecasts by 13.5% to account for better than expected sales volumes but leave FY22/23 forecasts unchanged. After our earnings adjustment our TP rises from RM5.48 to RM5.60 based on an unchanged valuation methodology of PE (24x) on FY23 net profit summed with free cash flows during the pandemic period. Maintain BUY.

Above expectations but in line with peers. 2Q21 core PATAMI of RM1,088.2m (+2.3% QoQ, ~7.4x YoY) brought 1H21’s sum to RM2,093.7m (~10.6x YTD). This was above our expectations but in line with peers, accounting for 80.4% and 63.4% of full year forecasts respectively. The better than expected profitability was due to relatively stable volumes. We had previously factored in significantly lower volumes QoQ from MCO restrictions on operations (which mandated that glove manufacturers operate at 60% workforce), which started in June. We deem this in line with peers as we expect 2H21 earnings to be weaker vs. 1H21 due to temporary shutdown in operations from the EMCO in 3Q21 and lower ASPs. Core PATAMI was arrived at after adjusting for EI amounting to RM13.0m from forex gains.

Dividend. Declared 12 sen DPS goes ex on 12 Aug 2021 (1H21: 24 sen). 2Q20 DPS: None declared. 1H20: None.

QoQ. Revenue (+2.1%) and core PATAMI (+2.3%) were slightly higher QoQ as marginally lower sales volumes were offset by higher ASPs (+5-7%).

YoY/YTD. Revenue (YoY: +219.0%, YTD: 237.4%) and core PATAMI spiked (YoY: 7.4x, 10.6x) mainly off the back of significantly higher ASPs of ~250% in 1H21 vs. 1H20 from voracious demand from the Covid-19 pandemic. This was in addition to higher sales volumes (+4-6%) in 1H21.

Outlook. In line with industry prices, we expect ASPs to begin to decline in 3Q21, as frantic buying of gloves cool as the global shortage of gloves begins to narrow. Note that China glove maker Blue Sail had recently began production of a facility with a capacity of 7.5bn pieces. Furthermore, with the EMCO implementation for two weeks in July and ongoing reduced worker capacities during the ongoing MCO, we expect overall earnings to be lower in 3Q21 QoQ.

Forecast. After the surprise in 2Q21 earnings, we increase our FY21 forecasts by 13.5% to account for better than expected sales volumes. We keep FY22/23 forecasts unchanged.

Maintain BUY, TP: RM5.60. Despite expected headwinds in 2H21, we maintain our BUY call on Kossan given that at current price levels Kossan trades at just ~20% above prepandemic level while ASPs in 2H21 are still expected to average over 3x its prepandemic level. Furthermore, with an attractive FY21/22 dividend yield of 14.1%/7.3%, we believe there is downside buffer. After our earnings adjustment our TP rises from RM5.48 to RM5.60 based on an unchanged valuation methodology of PE (24x; pre pandemic 5Y mean) on FY23 net profit summed with free cash flows during the pandemic period. Maintain BUY.

Source: Hong Leong Investment Bank Research - 28 Jul 2021