KEY INVESTMENT HIGHLIGHTS

• 9MFY20 results made up 64.5% of ours and 73.6% of consensus full year estimates

• 3QFY20 net profit surged by 609.2%yoy to RM348.7m

• 4QFY20 results likely to beat previous estimates

• Earnings for FY20E adjusted by 29% but we keep our FY21F forecast unchanged

• Maintain BUY with an unchanged TP of RM10.02

9MFY20 results made up 64.5% of ours and 73.6% of consensus full year estimates. We deem Kossan’s 9MFY20 results to be above our full-year forecast due to the stronger results anticipated in 4QFY20. An interim dividend of 3.0sen per share was announced, bringing YTD dividend to 4.0sen. We expect higher DPS in the upcoming quarter.

9MFY20 core net earnings ballooned +232.5%yoy to RM544.6m as revenue jumped by +42.8%yoy to RM2.35b. This comes on the back of the surge in demand for rubber gloves due to the Covid19 pandemic. It was also coupled with low raw material prices during the year where nitrile rubber prices declined by about 7%yoy. During the period, ASP increased by about 15%yoy while volume increased by 20.8%yoy.

3QFY20 net profit surged by 609.2%yoy to RM348.7m as revenue almost doubled to RM1.03b. Sequentially, net profit jumped by 166.1%qoq while revenue was up by 47.3%qoq. The higher sequential profit can be attributed to average selling prices (ASP) of gloves that hiked by 40% compared to 2QFY20. Coupled with that was higher production capacity, lifted by the additional capacity (~9%) from Plant 19, which started commission since August.

4QFY20 results likely to beat previous estimates. Due to the prolonged acute shortage of gloves, ASP continues to climb higher with an estimated 25%mom basis in 4Q. We believe that the high percentage in price adjustment can be attributed to Kossan catching up with market prices. On the other hand, the tight supply and increasing nitrile rubber prices are also expected to push ASPs higher as the manufacturer is able to pass on the cost to customers in a seller’s market. Nitrile rubber price is estimated to have increased by 50% to-date.

Orders seen up to end-2021. In a virtual briefing, management shared that some of its long-term customers have already placed in orders until end of 2021. That is despite the anticipation of the availability of an effective vaccine next year. We believe that distributors are ordering ahead as they expect demand to continue as gloves are needed for the administration of the vaccine. We think that another likely factor is the new record of new Covid-19 cases worldwide. Recently, global daily cases have exceeded 600,000 per day with US recording more than 100,000 cases per day and worsening situation in Europe that sent some cities into partial lockdowns.

Expansion plans are intact. Kossan’s cashpile stood at RM473.8m and that allows it to fund its expansion plans using internally-generated fund. For 1HFY21, it expects its plant 20 to be fully commissioned, adding another 1.5 billion pieces to its annual capacity. Following that, it targets to add 2 billion pieces in 2HFY21, 3 billion pieces in 1HFY22 and another 4 billion pieces in 2HFY22 for its Bidor site. Capex allocated for FY21 excluding land cost is estimated at RM250m for FY21 and RM350m to RM400m for FY22. We understand that raw material supply for its new FY21 capacity has been secured. However, we do note that the freeze in hiring of foreign labour may create a bottleneck situation if the company does not have enough man power to be relocated to the new plant.

Earnings for FY20E adjusted by 29% but we keep our FY21F forecast unchanged. We expect that 4QFY20 results may surprise on the upside. As such, we impute higher profit margin for 4QFY20. As a result, our core net income is being revised to RM1.09b from RM844.6m previously. That said, we keep our FY21F earnings estimates unchanged for now.

Maintain BUY with an unchanged TP of RM10.02. Our TP is based on 22.0x PER of FY21F EPS of 45.5sen. Our PER valuation is based on Kossan’s 10-year average, which is also the range that was used prior to the Covid-19 pandemic. We keep our BUY recommendation in view of its positive outlook. Possible risks to our call include a sooner-than-expected commercialization of an effective and safe Covid-19 vaccine, shift in habit of PPE consumption and disruption in its supply chain.

Source: MIDF Research - 10 Nov 2020