We believe market is under-appreciating the potential impact from higher-than-expected ASPs on Kossan under this pandemic and tight supply condition with buyers jockeying for allocation and pushing up ASPs. Hence, we raised our FY20E/FY21E net profit by 6%/11%, to account for higher ASPs. TP is raised from RM6.30 to RM7.20 based on 29.5x FY21E EPS (at +2.0SD above 5-year historical forward mean). Reiterate OP.

Consensus under-appreciating higher ASPs’ impact. We highlight that market consensus is under-appreciating the potential impact from higher-than-expected ASPs in this continuing pandemic and tight supply condition. Due to the tight supply, we expect buyers to jockey for position in order to secure allocation which will push up ASPs. Personal Protective Equipment (PPE) of which glove is one of the components is presently much sought after due to limited supply. Longer delivery lead times are indicating that demand will outstrip supply at least over the medium-term. We believe Kossan will benefit from robust demand which has led to industry longer delivery lead times (the moment order is placed to delivery) which has risen to an average of between 80 to 100 days as compared to 40 to 50 days normally. We understand that Kossan has raised prices by 3-5% in anticipation of higher demand and we also noted the industry current high >90% utilisation rate for nitrile-centric players which is a stark contrast compared to the lacklustre demand in 2019. However, we are more bullish on higher ASPs in 2H 2020 due to the present tight situation of buyers jockeying for position to secure allocation.

Game changer, potential further PER re-rating. Anecdotal evidence potentially suggest a potential further PER re-rating as Kossan is embarking on an aggressive capacity expansion as opposed to their past conservative stance to expansion. Recall, beyond plant 19, land clearing is underway in the Bidor plant, and the first plant is expected to start commercial operation in 2021, earlier than the previously targeted 2022.

Plant 17,18 and 19 to boost earnings over next two years. We understand that Plant 18 (2.5b pieces) was fully commissioned in Nov 2019. Plant 19 (3.0b pieces) currently has two to three lines commissioned and another two expected to be commissioned soon and on track for full operations by 1H 2020. Upon completion, these three new plants will bring the group’s total installed capacity to 32b (+28%) pieces of gloves per annum.

Raised FY20E/FY21E net profit by 6%/11%. We raise our FY20E/FY21E net profit by 6%/11%, taking into account higher ASP from USD22/1,000 pieces to USD25/1,000 pieces.

Trading at unwarranted 35% PER discount valuation to bigger peers. The stock has risen 41% YTD. We re-emphasis our bullish stance, expecting the stock to trade at +2.0SD in anticipation of a ramp-up in demand from restocking activities and higher-than-expected average selling price (ASP); hence, expectation of peak earnings growth in subsequent quarters. TP is raised from RM6.30 to RM7.20 based on 29.5x FY21E EPS (at +2.0SD above 5-year historical forward mean) from 28.5x. We expect the valuation gap to narrow considering KRI’s superior net profit growth of 25% vs. industry average of 19%.

Reiterate Outperform. Key risk to our call is slower-than-expected commissioning of the new plants.

Source: Kenanga Research - 12 May 2020