• We believe Kossan (KRI) reported a decent set of results, although 2020 PATAMI of RM1,087m (+384%) fell short of our expectation but was still within consensus estimates
• We are not concerned about the lower-than-expected profit, as it is mainly due to a higher effective tax rate and the supply disruption related to an outbreak at its factories in the 4Q20
• Moreover, management remains positive over the near-term outlook and is still guiding for ASPs to increase by >80% qoq for 1Q21. As such, we are maintaining our BUY call with a higher TP of RM9.30

Still Guiding for Stronger Quarters Ahead

KRI reported a decent set of numbers for 4Q20, as PATAMI increased by 55.6% qoq to RM542m, supported by a 50-60% qoq increase in ASPs during the quarter. Despite the strong ASP growth, management is still guiding for ASPs to increase by at least 80% qoq in 1Q21, and expects the rising trend to continue until at least 3Q21. We believe that management is optimistic about the outlook, as their capacity has been fully taken up until the end-2021 and is currently operating at >90% utilisation rate. Unsurprisingly, KRI believes that ASPs are likely to decline gradually in 2022, as demand for spot orders would start to ease, with more countries having access to the Covid19 vaccines.

4Q20 Could Have Been Better

We believe that the 2020 results falling short of our expectation was mainly due to several one-off issues, which we didn’t manage to incorporate into our forecast previously - a higher-than-expected effective tax rate in 4Q20 at 29% and also the 2-3 weeks of production disruption due to the Covid19 outbreak at its glove factories in 4Q20. As KRI has started to test its workers frequently, we believe that the possibility of similar disruption can be minimized; we estimate that the loss in production had lowered the profit of KRI in 4Q20 by around 5-8%. The effective tax rate was higher in 4Q, as KRI had utilised most of its tax credit due to the strong earnings in 2020, in our view.

Maintaining BUY as KRI Continues to Deliver

We are raising our EPS forecasts for 2021-22E by 4%-38% to factor in the latest ASP outlook, and increase our TP to RM9.30 based on an unchanged 23x (at mean) 2022E PER. Downside risks include shortage of raw materials and unexpected disruption of its manufacturing facilities. Reiterate BUY.

Source: Affin Hwang Research - 17 Feb 2021