Kossan (KRI) reported a decent set of results for 2019, as corePATAMI of RM224.8m (+12.5% yoy) is within both consensus and our forecast, constituting to 99% and 98% of our respective forecasts. KRI was able to minimize the impact from the labour shortage, as Plant 18 was fully commissioned as at end-Nov. Demand for rubber gloves remain strong, as sales volume has increased by 7.6% qoq in 4Q19. We have tweaked our earnings forecast for FY20-21E by 2.0-2.6%, to factor in higher demand from Covid-2019 and raised our TP to RM5.70. We are keeping our BUY call unchanged.

Demand From US Remains Strong

Demand for rubber glove in 4Q19 remained strong, as sales volume has increased by 7.6% qoq, with bulk of the incremental demand coming from the US and Europe. We believe the increase in sales was not due to price competition, as ASP remained relatively flat, while raw material prices has fallen by 1-5% during the quarter. The stronger demand from the US is likely due to the normalisation of buying pattern, which has benefited the Malaysian glove manufacturers. As most manufacturers are already operating at their optimal utilisation rate, we believe the recent surge in demand due to Covid-19 would allow them to raise selling price in 1Q20.

Pushing Ahead With Bidor Expansion

With the recent disposal of its industrial land at Kuala Langat, it does not come at a surprise to us that management has decided to bring forward the Bidor expansion, with a specialised glove plant to be completed by 2021 for a start. We believe that earnings growth in 2020 will be supported by the completion of Plant 18 (2.5bn) in end-Nov 2019 and Plant 19 (3.0bn) by end-Apr 20, which will add an additional 15% to its overall effective capacity by end of 2020. Based on management’s previous guidance, the Bidor land will take around 8 years to complete, and would more than double its current capacity of 28bn pcs/yr to around 65bn pcs/yr.

Reaffirm BUY Call With a Higher TP of RM5.70 (from RM5.60)

We have raised our EPS forecast for FY20-21E by 2.0%-2.6%, to factor in higher margin due to the recent demand surge arising from the Covid-19 outbreak. We have also raised our TP to RM5.70 (based on 27x 2020E PER). We maintain our BUY call unchanged. Top Glove and Kossan remains our preferred BUY pick for the sector.

Risks to Our Call

Key downside risks to our positive view on Kossan include: i) sudden movements in the US$ against the RM, ii) sharp changes in raw-material prices, and iii) greater-than-expected pricing competition among glove players.

Source: Affin Hwang Research - 24 Feb 2020