Kossan Rubber sees increased demand due to Covid-19

AMINVESTMENT Bank maintained its hold call on Kossan Rubber Industries Bhd with a lower fair value of RM14.32 from RM15.74 previously, based on a lower P/E of 24x FY21F EPS.

“We have lowered our P/E multiple to reflect the average three-year forward P/E for the group as we think that the bump in earnings will end the post-Covid-19 pandemic effects,” AmInvestment Bank analyst Nafisah Azmi said in a Sept 7 note.

In its second quarter ended June 30, 2020 (2Q20), Kossan recorded an increase in revenue of RM701.6 mil from its RM550.5 mil in 2Q19 and its earnings doubled to RM131 mil from 2Q19’s RM55.8 mil.

This is mostly attributed to Kossan’s improved demand due to the Covid-19 pandemic.

The group expects its sales volume to grow roughly 10% quarter-on-quarter (q-o-q) in 3Q20F and 5% q-o-q in 4Q20F.

About 15% of orders in mid-2021 have already been fixed, while there are also some orders that have been contracted for end-2021.

Its average selling price (ASP) has also improved due to the pandemic and the group expects a further increase of roughly 25% q-o-q in 3Q20 and 45% q-o-q in 4Q20.

The group’s spot order made up roughly 15% of sales volume but will gradually allocate more to spot orders, with the ASP hovering around US$60 to US$80 (RM248.91 to RM331.88) for every thousand pieces of gloves.

Meanwhile, the group is expecting the technical rubber product (TRP) segment to remain profitable despite the drag from the automotive segment.

Furthermore, the group’s expansion plans is still on track, with expectations to have a capacity of roughly 32 bil pieces in FY20F (+10%), 35.4 bil in FY21F (+10%) and 42.4 bil in F22F (+20%).

“We like Koaan as it is one of the biggest glove producers to benefit from the pandemic due to its expansionary plans and efforts in improving quality and operational efficiency,” Nafisah said.

“In the long term, we anticipate further improvements in Kossan’s operating efficiency. Therefore, we have raised our earnings forecasts for Kossan by 8% for FY20F, 2% for FY21F and 1% for FY23F,” she added.

Nafisah also said that AmInvestment have adjusted its ASP upwards by 4% in FY20F to around US$30 (RM124.46) and 2% in FY21F to US$30.

As of 9.36am today, the share price of Kossan Rubber Industries Bhd increased 0.75% to RM13.50 with a market capitalisation of RM17.27 bil.

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