1HFY20 PATAMI of RM65m (+71%YoY) came in at 29% each of both our and consensus full-year forecasts. We consider the results to be within our expectation in anticipation of higher ASP driving earnings growth QoQ. The group is confident of sustained strong demand with orders lined up till end-1HCY21, indicating that the impact from ASP hike will be felt in 2H 2020. With ASP rising m-o-m starting from July, new plants are on track to gradually commence starting 1Q CY21. TP remains at RM17.10 based on unchanged 27x FY21E EPS. A 1 for 1 bonus issue was proposed. Reiterate OP.

Key results’ highlights. QoQ, 2QFY20 revenue rose 15% due to higher contribution from rubber gloves (+15%) on higher volume sales (+6%) and ASP (+3-5%). Interestingly, clean-room gloves division revenue rose 86% albeit from a low base. Pre-tax profit rose 95% on the back of margin improvement due to higher ASP and better economies of scale and efficiency from new plants. Pre-tax margin rose 9.4ppt to 22.9% from 13.5% in 1QFY20. This brings 2QFY20 net profit to RM131m (+102% QoQ). No dividend was declared in this quarter as expected.

YoY, 1HFY20 revenue rose 18% due to higher contribution from the glove division (+21%), underpinned by higher volume sales (+14%) which more than offset lower ASP (-1%). This brings 1HFY20 PATAMI to RM196m (+71%).

ASP impact in 2H 2020, capacity plans on track. The group is confident of sustained strong demand with orders lined up till end-1HCY21, indicating that the impact from ASP hike will be felt in 2H 2020, while capacity ramp-up is on track to commence gradually. Specifically, July and Aug ASPs are up 20% and 40%, respectively, compared to 2Q ASP with orders lined up till end 1H CY2021. In the meantime, the planned capacity expansion over the next two years are as follow:- (i) Plant 20 located adjacent to Plants 18 and 19 with 1.4b pieces capacity which is expected to come on stream by early 2021, (ii) a recently acquired land in Meru located adjacent to one of its current plants which is earmarked for a single plant with 5b pieces capacity and to be completed in two phases i.e. Phase 1 – 6 lines, 2b pieces commencing in 2H 2021 and Phase 2 – 10 lines, 3b pieces commencing in 1H 2022, and (iii) 12 lines with 4b pieces capacity to fully commission in 2H 2022 in Bidor. Upon completion, these three new plants will bring the group’s total installed capacity from 32b to 42.4b (+33%) pieces of gloves per annum.

Maintain OP. We maintain our earnings forecasts. TP is RM17.10 based on unchanged 27x FY21E EPS (at +1.0SD above 5-year historical forward mean). Anecdotal evidence suggests further re-rating as Kossan is expanding capacity more aggressively compared to its past conservative approach. This potentially could fuel further PER re-rating Reiterate Outperform.

Key risk to our call is lower-than-expected ASP

Source: Kenanga Research - 26 Aug 2020