• Kossan (KRI) reported a strong set of 1Q21 results as core-PATAMI of RM1,092m (+1,585% yoy or +101% qoq) was above both our and consensus expectations
• We believe that the better-than-expected performance was due to the higherthan-expected realised ASP, which management had previously guided to increase by at least 50% qoq
• Due to the better performance, we are raising our FY21-23E earnings forecasts by 8.2%-81.5%, but reducing our TP to RM6.60 while maintaining our BUY call

Still Has Room to Raise Near-term ASPs

The strong improvement in KRI’s QoQ performance was mainly due to both an increase in sales volume and also higher ASPs. Sales volume was higher QoQ, as KRI was hit by a production disruption in 4Q20 due to the Covid19 outbreak at its main production hub. We believe that KRI was able to realise a higher ASP in the 1Q21, which increased by more than 50% qoq, and was higher than management had previously guided. Despite the sharp increase in ASPs, there is still room for KRI to increase its ASP as it is still below the industry leaders. As such, we are still expecting earnings growth for 2Q21.

Already Factoring ASPs to Peak in 2021 Then Gradually Decline

Our new forecast has already factored in ASPs to decline by 35-45% in 2022, which resulted in the decline in earnings for 2022. We believe that the ASP would decline gradually over the course of next year, rather than a sharp decline as some are expecting. Despite the increase in overall capacity by both new and existing players, we are not expecting ASPs to fall below pre Covid19 levels, as the current crisis would have helped to drive awareness of the importance of PPEs. Countries like China, have also started requiring the usage of medical gloves in healthcare facilities, due to the current outbreak.

Maintain BUY With a Lower TP at RM6.60

We are raising our earnings forecasts for 2021-23E by 8.2%-81.5% to factor in the better performance and higher realised ASP for the quarter. We are now pegging our target valuation to a lower PE multiple of 15.5x (at -1SD of historical average), which is lower than our previous 23.8x (at historical average), as investors remain sceptical on the ASP trend, and so lower our TP to RM6.60 (from RM9.30). However, we are keeping our BUY call, as the current valuation is too attractive to ignore. Downside risks include shortage of raw materials and unexpected disruption of its manufacturing facilities.

Source: Affin Hwang Research - 21 Apr 2021