We came back feeling more positive after attending Kossan’s (KRI) analyst briefing, as we reckon that ASPs will continue to trend higher due to a supply shortage. Management also indicated that they will be allocating 15-20% of capacity for higher-priced spot orders in 2H20, to take advantage of the current shortage. This will drive earnings higher and as such, we raise our TP for RM10.80, on the back of our 2020-21E EPS upgrade of 13%-24%. Reiterate BUY.

Higher ASPs to Drive Earnings Starting 3Q20

Management has guided that the overall price increase in 2Q is likely to be within 10%, as most of the orders during the quarter were locked in at much lower prices during the early stage of the outbreak. However, as 3Q orders were only sealed recently, the realised selling prices will no doubt be significantly higher than in 2Q, which we believe will be likely higher by 15-30% qoq. Apart from higher selling prices, KRI will also be allocating 15-20% (previously close to 0) of its capacity to meet demand from spot orders, where pricing is significantly higher (at least 2x) than normal orders. Although other manufacturers have started doing likewise, they are still unable to meet all demand.

Real Consumption Reduces Risk of Future Price War

We believe that most of the current demand is for consumption rather than inventory stocking, as distributors/end user are willing to pay higher prices for gloves. Given that gloves sold recently are for immediate consumption, this should help to reduce the risk of a price war post COVID-19, unlike the previous outbreak where sales plummeted post outbreak. As we are only forecasting a 10-12% increase in overall capacity by the Big-4 players in Malaysia by the end of 2020, we believe that the current supply is still insufficient to meet the robust demand. KRI’s management believes that demand has increased by 30-50% during the outbreak.

Reaffirm BUY Call With a Higher TP of RM10.80

We have raised our EPS forecasts for FY20-21E by 13%-24% to factor in higher realised selling prices due to the severe shortage in rubber gloves. There could be further upside risk to earnings if raw-material prices continue to fall. We also raised our TP to RM10.80 (based on an unchanged 33x on 2021E EPS) and maintain our BUY call. Top Glove (TOPG MK, RM14.80, Buy) and Kossan remain our preferred BUY picks for the sector.

Source: Affin Hwang Research - 3 Jun 2020