RHB Research has maintained its buy recommendation on Kossan Rubber with a higher target price of RM6.50 as global demand for gloves spikes amidst the Covid-19 pandemic.
Its analyst Alan Lim said: “In view of their scarcity globally, we believe an average selling price (ASP) increase is imminent. Even after the pandemic subsides, Kossan Rubber’s earnings should still grow in line with glove consumption growth: 8-10% per annum.”
In a recent teleconference, Kossan said demand for gloves had surged since February due to Covid-19 with rising orders from China. From March, other countries – including the US and Europe – also increased orders. Due to the exceptionally high demand, Kossan’s orders are secured up to September. Its plant utilisation rate is now almost full at 90-95% vis-à-vis normal levels of 80-85% before Covid-19.
There is also minimal impact from the Movement Control Order. “We gather that gloves are deemed essential. Hence, Kossan’s factory is still operating. However, office staff is at 50% capacity. In terms of expansion, Plant 19’s construction is still proceeding, but at a slower pace. Having said that, the company maintained its target that Plant 19 should be completed by end-June. Upon completion, capacity will increase 10% to 32 billion pieces per annum (ppa),” said Lim.
In view of the scarcity of gloves globally, RHB expects selling prices to increase. The trend of rising ASPs probably just started in March, and it believes there is still room for further increases, as demand for gloves remains exceptionally high. As a result, RHB raises Kossan’s FY20F-22F earnings by 3-8%.
RHB’s target price implies 25.9x FY21F price-to-earnings (P/E), +1.1SD above its forward P/E. This is still conservative against a peak valuation of 33.9x forward P/E.
The current share price values Kossan at 21.9x 2021F P/E, or close to its five-year average. In view of the imminent ASP increase and ongoing spread of Covid-19, RHB believes the stock’s current valuation remains attractive. Kossan’s peak forward P/E was 33.9x.
RHB maintains its recommendation with a higher target price of RM6.50 in line with the better earnings estimates. In the near term, it expects Kossan to report a strong set of results in 1Q20, which should be announced in May. This is supported by higher sales volumes, a stronger USD/ringgit, and lower raw material prices.
“In the long run, Kossan is a beneficiary of the long-term uptrend of global glove consumption, at 8-10% per annum, even without Covid-19. Risks to our call include lower-than-expected sales volumes and USD/ringgit, as well as higher-than-expected raw material prices,” the research house added. — April 21, 2020
