Kossan’s 4QFY20 core PATAMI of RM489.2m (+38.2% QoQ, +585.2% YoY) brought the FY20 sum to RM1,040.9m (+354.2% YoY). This was in line with both ours and consensus expectations at 101.6% and 96.2% respectively. Our forecasts remain unchanged. After changes to balance sheet items, our TP is adjusted slightly higher to RM5.22 (from RM5.12) based on unchanged modified DCF-valuation methodology.

In line. 4QFY20 core PATAMI of RM489.2m (+38.2% QoQ, +585.2% YoY) brought the FY20 sum to RM1,040.9m (+354.2% YoY). This was in line with both ours and consensus expectations at 101.6% and 96.2% respectively. Core PATAMI was arrived at after adjusting for EI of forex losses and disposal of land amounting to RM46.2m.

Dividend. Declared 11 sen DPS, which goes ex on 3 Mar 2021 (3 sen interim + 8 sen special dividend). This brings FY20 DPS to 14 sen vs FY19 of 3 sen on a comparable basis (after adjusting for 1-for-1 bonus issue).

QoQ. Glove sales volumes were lower QoQ due to temporary disruption in Kossan’s productions due to Covid-19 outbreak in 4Q20 which resulted in lower utilisation rate. Despite this, the significantly higher ASPs (>50%) more than compensated for lower volumes, resulting in revenue rising +26.5%. Core PATAMI rose +38.2% in tandem with better topline.

YoY. Revenue more than doubled (+126.0%) due to significantly higher glove ASPs (>120%) and volumes (+15%) due to increase demand for gloves during the Covid -19 pandemic. Despite increase in raw material cost, core PATAMI rose to RM489.2m on the back of positive operating leverage (+585.2%).

YTD. Revenue increase of +64.8% was driven by higher ASPs (>40%) and volumes (+20%). Kossan shared that in FY20, raw material prices were up (NBR: +5-15%, NR: +7-9%). Despite this, core PATAMI rose +354.2% in line with better sales.

Outlook. Going forward, we expect Kossan to continue to capitalise on strong glove demand by adding circa 3.5bn pieces capacity in FY21. While ASPs in 4Q20 rose sharply (>50%), Kossan expects 1Q21 ASPs to continue on the uptrend, with an estimated further 50% increase in ASP. We reckon this is achievable as Kossan’s ASPs would still lag market prices by 20-30%. This is in line with our in house view that glove ASPs will continue to sustain for the remainder of FY21 and possibly begin to taper downwards in 4Q21. Note that despite increase in overall market glove supply, we still expect there to be a shortfall of ~12.5bn pieces in FY21. Kossan shared that sales have been locked in for the entirety of FY21, with spot orders accounting for 10-15% of total sales.

Forecast. Unchanged.

Maintain BUY, TP: RM5.22. After changes to balance sheet items, our TP is adjusted slightly higher to RM5.22 (from RM5.12) based on unchanged modified DCF-valuation methodology (Figure #2). We value Kossan using with their pre-pandemic 5-year average PE multiple of 24x (CY15-19) based on sustainable earnings in a post-super normal earnings environment (FY23) summed with free cash flows (both discounted back to PV) generated during the boom period.

Source: Hong Leong Investment Bank Research - 17 Feb 2021