KOSSAN Rubber Industries Bhd saw the results for the first half of its 2020 financial year beating expectations, according to MIDF Research, with the boost driven by the stronger demand for gloves and improved efficiency of Kossan’s operations.
Net earnings for Kossan came in at RM130.8 mil, 45.3% of MIDF’s full year estimates.
“This is because we expect a stronger 2H20 on the heel of heightened average selling prices (ASP) for gloves in-line with the industry trend,” said MIDF analyst Ng Bei Shan.
The analyst also noted that the calculation for Kossan’s core net income excluded forex gains and losses on derivatives.
For the quarter itself, Kossan saw its glove and clean room segments offsetting the weaker performance of the technical rubber products (TRP) segment.
“The glove segment saw volume increased by 14% at higher ASPs. Meanwhile, demand for its cleanroom products increased significantly due to the Covid-19 pandemic.”
“On the other hand, the TRP segment was adversely impacted by the pandemic, as the
movement control order (MCO) has disrupted its operations. On top of that, demand for TRP was softer due to the slowdown in the infrastructure and automotive industries,” said Ng.
The analyst noted that, based on channel checks, gloves are still in shortage at this juncture, which means ASPs should remain high.
“This should bode well for Kossan as it has also increased its production capacity. This is supported by the full commissioning of 10 production lines in Plant 19. We think the ASPs may further increase in the next two quarters,” said Ng.
The analyst also believes that the proposed bonus issue by Kossan will improve the liquidity in trading of its shares. The proposed bonus issue is at the ratio of one-for-one, at a date to be determined later.
“The lower absolute price per share is also likely to broaden the participation of investors,” said Ng.
MIDF maintains a neutral call on Kossan, with a higher target price of RM15.35 from a previous RM12.32.
“While we think that earnings will be much stronger in the upcoming quarter, we believe that the capital upside may be limited in the near-term as the bright outlook is likely to be priced in at this juncture,” said Ng.
At the end of the trading day, Kossan’s shares were last done at RM15.30, up 66 sen, with 8.1 million shares traded. – Aug 26, 2020
