Kossan reported a headline net profit growth of 383.9% YoY in FY20, to a record high of RM1.09bn. The stellar results included a one-off asset disposal gain of RM50.7m. Stripping out the non-recurring contribution, Kossan’s core net profit for FY20 stood at RM1.04bn, still registering a whopping 361.9% YoY increase. The results came in within both our and street estimates at 98% and 94% respectively. We highlight that Kossan’s capacities for FY21 are fully taken up and it expects ASP increases to sustain up till 3QFY21 at least. Kossan also expects a 50% QoQ ASP increase in 1QFY21. We roll over our valuation to CY22F EPS and our TP is subsequently lowered to RM6.10, pegged to an unchanged PE multiple of 9x. We maintain our Trading Buy call on Kossan. On a side note, Kossan has also declared an interim dividend and special dividend of 3sen and 8sen respectively.

• Higher ASP effect offset by various factors. While Kossan’s gloves ASP rose by more than 50% QoQ in 4QFY20, however, its revenue grew by a much lower quantum of 26.5% QoQ, to RM1.3bn. We reckon that the positive impact of higher ASP was partly mitigated by lower sales volume, considering that Kossan’s plant in Klang was closed temporarily in mid December, upon discovery of Covid-19 cases among its workers. Shipping container shortage, which resulted in revenue recognition delay, has also contributed to revenue growing at a slower pace. Raw material prices were also higher on a QoQ basis, where nitrile butadiene prices rose by more than 40%, while latex prices were higher by c.24% QoQ. However, the ASP increase was more than enough to absorb the higher cost and core PAT margin expanded by c.4ppts QoQ to 37.6%. Core net profit, after stripping out the asset disposal gain of RM50.7m, grew by 41% QoQ to RM491.8m.

• Expansion. Kossan’s expansion plan remains intact, with 2 lines in Plant 20 (5 lines, +1.5bn pcs pa) being commissioned thus far, and we expect the remaining 3 lines to be full commissioned by 2QFY21. As for the newly acquired land in Meru, expansion 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.

• Outlook. For its gloves division, Kossan expects its ASP to increase by at least another 50% QoQ in 1QFY21 and expects ASP hikes to sustain until 3QFY21 at least, but potentially at a lower quantum of increase. Based on the current nitrile butadiene prices, Kossan is expecting to cap ASPs at c.USD120 per thousand pcs. However, should the raw material prices continue to rise, ASPs will also be adjusted accordingly to absorb the higher costs. As for its technical rubber products (TRP) segment, Kossan expects it to benefit from higher infrastructure spending, as well as the automotive sector’s continuous recovery

Source: PublicInvest Research - 17 Feb 2021