Although Kossan’s (KRI) 1Q20 core-PATAMI of RM64.8m (+10.4%) was only 23% and 21% of consensus and our estimates, we believe that the performance is still largely in line with expectations. The earnings growth (+6.5% qoq; 10.4% yoy) is largely driven by higher sales volume, as there were only marginal price increases during the quarter. Due to the spike in demand from COVID-19, we are expecting stronger quarters ahead, and as such we are revising up our earnings for FY20-22E by 7.5%-11.5%, and our TP to RM9.50. Reiterate BUY.

No Surprise in 1Q20 Performance

As Kossan only started to raise their selling prices in end-March, the earnings growth in 1Q20 was mainly driven by the increase in sales volume, supported by the full contribution of Plant 18 (2.5bn) completed in 4Q19. Overall sales volumes have increased by 8.3% qoq or 7.4% yoy. Although Kossan has started to commission Plant 19 (3.0bn) progressively in 1Q20, the contribution from the plant is marginal. Given the delay during the MCO, Plant 19 will only be fully commissioned by June (2 months delay). Plant 18 & 19 will add an additional 15% to the current capacity.

Stronger Earnings Ahead

We believe that the earnings growth for Kossan for 2020-21 will be driven mainly by the selling price hike. As such, the earnings prospects remain intact, despite the delay in completion of Plant 19. Due to COVID-19, the shortage of rubber gloves have provided manufacturers like Kossan greater flexibility to raise prices. Given that the overall cost structure is expected to remain relatively stable for the next few quarters, we are expecting its PAT margin to improve from the current 10.7% to 14% in coming quarters.

Reaffirm BUY Call With a Higher TP of RM9.50

We are raising our EPS forecasts for FY20-22E by 7.5%-11.5% to factor in a higher realised selling price, due to the severe shortage of rubber gloves. We also raise our TP to RM 9.50 (based on unchanged 33x 2021E PER). We are reiterating our BUY call given its strong earnings prospects. Top Glove (TOPG MK, RM11.66) and Kossan remain our preferred BUY picks 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 - 22 May 2020