KEY INVESTMENT HIGHLIGHTS

• 1HFY20 earnings beat estimates 
• 2QFY20 driven by stronger demand for gloves and better efficiency
• Elevated demand to drive higher ASPs
• Earnings estimates revised by 49%/45% for FY20E and FY21F
• Bonus issue as a sweetener
• Maintain NEUTRAL with a revised TP of RM15.35

1HFY20 earnings beat estimates. Kossan’s 1HFY20 core net earnings of RM130.8m were slightly above our expectation at 45.3% of our full year estimates. This is because we expect a stronger 2HFY20 on the heel of heightened average selling prices (ASP) for gloves in-line with the industry trend. We have excluded mainly forex gain and loss on derivatives in our core net income calculation. No dividend was announced in the quarter.

2QFY20 driven by stronger demand for gloves and better efficiency. Core net profit for the quarter leaped +134.1%yoy to RM130.8m as revenue jumped by 27.5% to RM701.7m. During the quarter, better pre-tax profit from the glove (+175.3% yoy to RM227.7) and clean room (+866.7% to RM10.4m) segments offset the weaker onyear performance of the technical rubber products segment (TRP) (- 65.0%yoy to RM5.0m). The glove segment saw volume increased by 14.0% at higher ASPs. Meanwhile, demand for its cleanroom products increased significantly due to the Covid-19 pandemic. On the other hand, the TRP segment as adversely impacted by the pandemic as the movement control order has disrupted its operations. On top of that, demand for TRP was softer due to the slowdown in the infrastructure and automotive industries.

Sequentially, core net profit rose 117.3%qoq riding on revenue that increase by 14.8%qoq. Compared to 1Q20, volume sold for glove improved by 21.1% while ASP continued to improve.

Elevated demand to drive higher ASPs. Based on channel checks, gloves are still in shortage at this juncture, which means that ASPs should remain high. This should bode well for Kossan as it has also increased its production capacity. This is supported by the full commissioning of 10 production lines in Plant 19. We think the ASPs may further increase in the next two quarters.

Earnings estimates revised by 49%/25% for FY20E and FY21F. We impute higher ASPs as we think that demand will remain strong in the at least in next two quarters driven by the high number of active cases globally.

Source: MIDF Research - 26 Aug 2020