Kossan report a 9MFY20 net profit of RM544.6m, spiking by 232.5% YoY, due to the better pricing for gloves as well as higher sales volume. Kossan’s performance came in above our but was in line with consensus estimates at 81% and 74% of full-year numbers respectively. Despite hiking ASP, Kossan’s ASP still lags behind some of its peers and further ASP revisions are expected in the coming quarters as Kossan continues narrowing the pricing gap. We raise our forecasts for FY20-22F by 57-247% to account for the higher ASP. Our TP is also subsequently raised to RM9.40, based on a PE multiple of 9x (at its 5-year historical mean). We upgrade Kossan from Neutral to Trading Buy as we think it still has more room to raise ASP in the coming quarters. Fresh developments on the potential vaccine could hamper near-term share prices however. Nonetheless, we think that it would still take c.2 years to have the entire global population vaccinated upon the rollout of a vaccine, therefore any short term price weakness would be an opportunity for investors to accumulate. On a side note, Kossan also announced a dividend of 3sen per share.

• Showing the impact of ASP hike. Kossan’s 3QFY20 revenue jumped significantly by 94.5% YoY to RM1.03bn, on account of increasing ASP, up by 44-46% YoY, and higher sales volume, which grew by 34.9% YoY. Raw material prices were also lower on a YoY basis, where nitrile butadiene rubber prices were down slightly by c.1% YoY, while latex prices declined by 4-6% YoY. Given the lower raw material prices and higher ASP, PAT margin expanded by 24.4ppts YoY to 33.7% and net profit also leaped by 609.2% YoY to RM348.7m as a result.

• Expansion. Plant 20 (5 lines, +1.5bn pcs pa) is currently undergoing lines installation, with the first line expected to be commissioned in 1QFY21 and full commissioning is targeted to be in 2QFY21. Expansion on the recently acquired land in Meru will be carried out in two phases. 1st Phase (6 lines, +2.0bn pcs pa) will begin commissioning in 2HCY21, while commissioning of the 2nd Phase (10 lines, +3bn pcs pa) is scheduled to begin in 1HCY22.

• Rising raw material costs and foreign labour concerns. Given the tight supply in the market, NBR prices are expected to increase by 25% on a QoQ basis in 4QFY20. However, we find understand that Kossan has locked in sufficient supplies for production in FY21. As for foreign labour, we gather that Kossan plans to free up some headcounts from its existing factories and reallocate the manpower to support the new plants that are expected to start operating in FY21.

• More price hikes ahead. Prices for Kossan’s glove still lags behind its competitors at this point and it will be raising ASPs furthers to narrow the gap. Kossan is expected to raise ASPs by another 25% on a MoM basis in 4QFY20. With the steep ASP hike projected, we are less concern over the rising raw material cost as the price revision can sufficiently account for the higher cost and given the current tight glove supply, we think the glove makers are also able to pass on part of the cost increase to its buyers. With that, we raise our projections for FY20-FY22F by 57-247%, considering the higher ASP expected.

Source: PublicInvest Research - 10 Nov 2020