KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings within expectations

• Higher earnings in 1QFY20 driven by stronger demand for gloves

• Higher ASP due to strong demand for gloves

• Earnings estimates revised upwards

• Maintain NEUTRAL with a revised TP of RM9.00

1QFY20 earnings within expectations. Kossan’s 1QFY20 core net earnings of RM60.2m came in within expectations, making up 22.3% and 21.6% of our and consensus full year estimates respectively. Note that we have excluded mainly forex gain and loss on derivatives in our core net income calculation.

Higher earnings in 1QFY20 driven by higher demand for gloves.

1QFY20 core net earnings was higher at RM60.2m (+3.7%), in line with higher topline of RM611.5m (+8.9%yoy). The higher earnings were driven by higher average selling price (ASP) (+~2%yoy) of gloves and higher sales volume (+7.4%yoy) due to Covid-19 pandemic. Besides, lower raw material prices have also support earnings growth in 1QFY20. Note that cost of Nitrile Butadiene Rubber (NBR) fell by >10% while cost of natural rubber latex fell by >5%.

Higher ASP due to strong demand for gloves. ASP of gloves is expected to increase significantly in 2QFY20 as the surge in demand for gloves beginning April has caused shortage of gloves. Besides, earnings growth of Kossan will be supported by the higher production volumes in tandem with its expansion plan. Its Plant 19 has so far commissioned 6 production lines beginning January while all 10 lines are expected to be fully commissioned by June 2020. Hence, we are revising our FY20/21/22F earnings forecasts by +37.5%/+20.5%/+11.7% to mainly factor in the higher ASP and higher sales volume.

Maintain Neutral with a revised TP of RM9.00. Post upward revision in earnings, our TP for Kossan is revised to RM9.00 (previously RM4.64), pegging our FY20F EPS of 29.1sen to PER of 31x which is close to +2SD of its 3-year mean. We value Kossan at +2SD of its mean PER due to the strong demand outlook for gloves in the medium term. Nevertheless, we maintain our Neutral call on Kossan as we view the positive earnings prospect has been priced in.

Source: MIDF Research - 22 May 2020