CONTRARY to JP Morgan’s bearish outlook on the sustainability of the Malaysian glove sector, CGS-CIMB Research has again begged to defer as evident in its latest assessment on Kossan Rubber Industries Bhd – a member of the Big Four glove stocks.
In a gist, the local research house sees Kossan as an attractive proposition given the company’s current valuation has yet to reflect its stellar earnings prospects and solid dividend yields.
This is despite the research house adjusted downward Kossan’s target price by 16.6% to RM7.64 from RM9.16 previously (while maintaining its “add” stance).
“Note that we now peg Kossan to the glove sector’s five-year mean despite its robust earnings prospects as we think the stellar numbers we forecast for FY2021-2023F may be unsustainable in the long run,” justified analyst Walter Aw in a company update.
“Nevertheless, we continue to like Kossan for its strong earnings prospects (three-year earnings per share [EPS] compound annual growth rate [CAGR] of 79.6%) as it stands to benefit from the favourable supply-dynamics in the glove sector owing to COVID-19.”
According to CGS-CIMB Research, it has been made to understand that the company’s capacity has been fully taken up until end-CY2021F and that it is already receiving orders for 1Q 2022F.
“It (Kossan) has also fully filled up its allocation for spot orders which utilise up 15-20% of its total capacity till end-1Q 2021F,” revealed Aw.
Moreover, Kossan has already increased its average selling prices (ASPs) by 40% quarter-on-quarter (qoq) in 3Q 2020 and the demand-led environment will allow the company to raise them further.
“In a recent briefing, Kossan said it expects an ASP increase of 50% qoq in 4Q 2020 as well as in 1Q 2021F,” noted the research house.
“The company also highlighted that it is not discounting further ASP hikes from 2Q 2021F onwards given that its current ASPs are still below the industry average.”
Another positive note is that Kossan has resumed full operations post the detection of positive COVID-19 cases at its production facility.
“We estimate the capacity loss at 1.5% of Kossan’s total annual output and that the financial impact was minimal as we believe the quantum of its ASP hikes would be more than sufficient to offset the temporary capacity loss during the period,” projected CGS-CIMB Research
To recap, Kossan had to halt 25% of its total production capacity from Dec 7 to 31 in view of a COVID-19 outbreak among its workers (circa 990 cases among its 7,000 workers).
At 10am, Kossan – the cheapest among the Big Four glove stocks – was up 10 sen or 2.35% at RM4.36 with 4.49 million shares traded, thus valuing the company at RM11.15 bil. – Jan 15, 2021
