• Overview. 3QFY20 revenue increased to RM1bn (47.3% qoq, 94.5% yoy), while net profit jumped to RM348.7m (166.1% qoq, 609.2% yoy). The stronger results were mainly due to higher sales volume (9.2% qoq, 34.9% yoy), increase in ASPs (40-42% qoq, 44-46% yoy) and better production efficiency. Profit margin improved to 33.7% (+15.1 ppts qoq, +24.5 ppts yoy).
• Key highlights. Kossan’s sales have been fully taken up until end-2021, with orders for 2022 currently being received. According to management, ASPs have seen increase of c.40% qoq in 3Q and will increase 25% mom until Dec. Plant expansion remains on track and is expected to increase total installed capacity from current 32bn to 42.4bn (+33%) by end-2022. (refer table 3).
• Against estimates: Above. 9MFY20 net profit of RM544.6m (+232.5% yoy), made up 80% and 75% of our and consensus full year forecast. We deem this to be above expectations, owing to higher-than-expected increase in ASPs which will be reflected in upcoming quarters.
• Outlook. We estimate Kossan’s prospect to remain strong. It is seen as catching up in ASPs with its peers and expected to record sequentially stellar performance in the coming quarters. Long-term demand post-Covid-19 is expected to remain higher due to structural change in glove usage globally and greater hygiene awareness. We have increased our FY20/FY21f earnings forecast by 65%/95% as we pencil in higher ASPs and margin.
• Our call maintain BUY. Despite our higher earnings revision, we maintain our TP at RM10.00, implying a lower PER of 14x (from 30x previously) which is based on FY21f EPS. Lower implied PER is to reflect our view of earnings peaking in FY21f and a moderation in earnings growth towards more sustainable levels beyond that. The market sentiment might be weaker due to the positive news of the progress made in vaccines development.

Source: BIMB Securities Research - 10 Nov 2020