1QFY20 PATAMI of RM65m (+11%YoY) came in at 23% each of both our and consensus full-year forecasts. However, we believe our earlier projections could have been too conservative now in light of the emerging strong earnings growth potential in coming quarters. This is due to the tight supply situation with buyers jockeying for allocation and pushing up ASPs. Hence, we raised our FY20E/FY21E net profit by 25%/31% imputing higher ASPs. TP is elevated from RM7.20 to RM9.60. Maintain Outperform.

Key results’ highlights. QoQ, 1QFY20 revenue rose 6% due to higher contribution from rubber gloves (+7%) on higher volume sales (+8%) which more than offset lower ASP (-0.5%). Pre-tax profit rose 14% on the back of margin improvement due to better economies of scale. Pretax margin rose 1ppt to 13.5% from 12.5% in 4QFY19. This brings 1QFY20 net profit to RM65m (+6% QoQ). No dividend was declared in this quarter as expected.

YoY, 1QFY20 revenue rose 9% due to higher contribution from the glove division (+10%), underpinned by higher volume sales (+7.4%) which more than offset lower ASP (-1%). This brings 1QFY20 PATAMI to RM65m (+10%).

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 is 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.

New expansion ambition a game changer, potential further PER rerating. Anecdotal evidence is potentially suggesting further PER rerating as Kossan is embarking on an aggressive capacity expansion as opposed to their past conservative stance with regard 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.

Raised FY20E/FY21E net profit by 25%/31%taking into account: (i) higher ASP from USD25/1,000 to USD29/1000 pieces, and (ii) higher utilisation rate from 86%/90% to 90%/98%.

Maintain Outperform. The stock has risen 108% YTD. We reemphasis our bullish stance, expecting the stock to trade at +2.0SD in anticipation of a ramp-up in demand from re-stocking activities and stronger average selling price (ASP); hence, expectation of sustained robust earnings growth in subsequent quarters. TP is accordingly raised from RM7.20 to RM9.60 based on 30x FY21E EPS (at +2.0SD above 5-year historical forward mean). Reiterate Outperform. Key risk to our call is slower-than-expected commissioning of the new plants.

Source: Kenanga Research - 22 May 2020