In an announcement to Bursa Malaysia, KOSSAN disclosed that it has conducted a re-screening of employees in its COVID-19 affected plant premises. Arising from the screening, an additional 563 positive cases were detected, as at 21 December 2020. However, we continue to remain positive of sustained strong demand with orders filled up till end-CY21, with ASP playing catch-up in 4QFY20 and 1QFY21. However, due to concerns over new COVID-19 cases and hence temporary production disruption, we conservatively cut our TP from RM9.36 to RM7.50 as we attach a 20% discount to our target PER from 11x to 8.8x FY21 EPS. Reiterate OP.

Hit by an additional 563 positive COVID cases bringing the total to 990. In an announcement to Bursa Malaysia, Kossan disclosed that it has conducted a re-screening for employees in the affected plant premise. Arising from the subsequent screening, an additional 563 positive cases were detected, as at 21 December 2020 raising the total to 990. The group continues to monitor the situation closely and will carry on with the re-screening exercise on an ongoing basis. Recap - the group last week conducted a voluntary COVID-19 screening test in its Glove division from Dec 4 to Dec 10. Out of a total of 7,004 workers, five out of six locations registered zero cases with only one site reporting 427 positive cases out of 2,104 employees. The factory stopped operations for sanitisation which has been completed. Thereafter, the group will undergo random sampling for antigen test due to asymptomatic symptoms every two weeks (20% of workers). The plant will remain closed until 31 December. The temporary loss in production comprised 25% of total output volume for one month which is expected to impact FY20E bottom-line by 3-5%.

ASP to rise in 4QFY20 and 1QFY21. The group is confident of sustained strong demand with orders filled up till end-CY21, reassuring us that lag impact from ASP hike will be felt in 4Q 2020 (50% QoQ)) and 1Q 2021 (+30% QoQ). Recall that in a meeting last week, management highlighted that it is difficult to predict when ASP will retrace but they stopped short of hinting ASP hikes will gradually ease sometime in 4Q 2020, but more likely the case in 2022 (rather than facing a steep decline) depending on the outcome of the effectiveness of COVID-19 vaccines. A retracement in ASP then, if any, would likely in their view, be gradual to be cushioned by restocking activities.

Maintain OP. However, due to potential concerns arising from new COVID-19 cases and hence causing temporary disruption in production, we conservatively reduce our TP from RM9.36 to RM7.50 as we attach a 20% discount to our target PER from 11x to 8.8x FY21 EPS. We highlight that to reduce the spread of COVID-19 infections; vaccination coverage should reach at least 60%-70% to build some form of herd immunity. Typically, herd immunity occurs when enough people in a population develop protection against a disease that it can no longer spread easily among them.

Key risk to our call is lower-than-expected ASP and demand beyond FY21.

Source: Kenanga Research - 23 Dec 2020