KOSSAN Rubber Industries Bhd – the smallest among Malaysia’s Big-Four glove makers – suddenly finds itself in a ‘test bed’ position with regard to the share price sustainability of its fellow industry players in the middle to longer term.
This is after Kossan unveiled that its 1H FY2021 net profit grew by 975.6% year-on-year (yoy) to RM2.11 bil on the back of stronger average selling prices (ASPs) and sales volume on a yoy basis.
The glove maker also declared an interim dividend of 12 sen/share, bringing its total cumulative dividend for FY2021F to 24 sen per share.
Although the results came in above its estimates at 69% (and that of consensus at 64%), PublicInvest Research still deemed that ASPs have peaked in 2Q FY2021 with gradual decline expected in 2H CY2021 as vaccination programme continues to pick up speed globally.
“We think the expectation of lower raw material prices in 2H CY2021 will also contribute to the ASP decline,” projected analyst Chua Siu Li in a results review.
Towards this end, PublicInvest Research maintained its “neutral” call on Kossan with an unchanged target price of RM3.65 which implies a PE (price-to-earnings) multiple of 21 times at five-year pre-COVID historical mean based on CY2023F earnings per share (EPS) of 17.1 sen.
Maybank IB Research also believes that Kossan’s strong 1H 2021 earnings performance will not be sustainable as ASP has started to trend down since May 2021 (its ASP assumptions for 1Q/2Q/3Q/4Q 2021: US$75/79/71/57 per 1,000 pieces) on lower gloves supply deficit and rising vaccination rates around the world.
“We lower our earnings forecasts by -1.4% to -21% to factor in lower utilisation rate on the NRP (National Recovery Plan) Phase 1 and the EMCO (enhanced movement control order),” justified analyst Wong Wei Sum.
All-in-all, the research house retained its “hold” rating on Kossan with a lower target price of RM3.16 (from RM3.20 previously) based on 20 times FY2023 PE.
Meanwhile, Hong Leong IB (HLIB) Research which is most bullish about Kossan’s prospects, maintained its “buy” call with a higher target price of RM 5.60 (from RM5.48 previously) on Kossan.
“(This is) given that at current price levels, Kossan trades at just circa 20% above pre-pandemic level while ASPs in 2H 2021 are still expected to average over three times its pre-pandemic level,” opined analyst Gan Huan Wen.
“Furthermore, with an attractive FY2021/2022 dividend yield of 14.1%/7.3%, we believe there is downside buffer.”
At 9.10am, Kossan was up 15 sen or 4.56% to RM3.44 with 838,200 shares traded, thus valuing the company at RM8.78 bil. – July 28, 2021
