Kossan reaches new all-time high as analysts raise earnings forecasts, target prices

KUALA LUMPUR (July 27): Shares in Kossan Rubber Industries Bhd reached a new all-time high today, after analysts covering the stock raised their earnings forecasts and target prices (TPs) for the counter.

At 10:11am, Kossan was first on the local bourse’s top gainers list. The counter was up by 8.26% or RM1.14 to RM14.94, giving it a market capitalisation of RM19.11 billion.

In terms of trading volume, it saw 3.86 million shares done.

Hong Leong Investment Bank (HLIB) Research and CGS-CIMB Research are expecting greater earnings for Kossan, and raised their TPs on the glove company due to higher average selling prices (ASPs) for its gloves combined with greater capacity.

HLIB Research analyst Farah Diyana Kamaludin noted that with ASPs being fixed one and half months to two months prior to delivery, it is expected the increase in prices will only start to be reflected in deliveries towards the end of the second quarter of the year (2Q20), and thus fully reflected in the second half of the year (2H20).

“As we understand, preliminary prices indicate July and August would be seeing an increase of circa 20% and 40% versus 1Q20, respectively, and further circa 5% increase month-on-month (m-o-m) till year-end. Furthermore, spot orders ASPs [are] lingering around US$60-US$80 per 1,000 pieces,” she said in a note after participating in a sell-side analyst briefing with Kossan on Friday.

The rubber glove manufacturer revealed that as it stands, current capacity is 29 billion pieces a year. Its Plant 19 is expected to run with 10 lines by August as planned. As a result, Kossan will have a total capacity of 32 billion pieces at the end of its financial year ended Dec 31, 2020 (FY20), with an additional 1.4 billion pieces with lines in 1H21.

Its recent land purchase in Meru, Klang will start production as early as 2H21, with six lines producing 2 billion pieces.

Consequently, Kossan’s total capacity in FY21 would reach 35.42 billion pieces, up 10.46% year-on-year.

“With the new capacity adding in, Kossan will be able to allocate circa 10-15% of production for spot orders (currently circa 10%),” she noted.

Following further details on its expansion plans, Farah said she was increasing earnings forecasts for FY21 to FY22 by around 8% to 19%.

The HLIB Research analyst maintained her "buy" call on the counter, while raising her TP to RM17.75, from RM16.37 previously.

Also at the briefing was CGS-CIMB Research’s Walter Aw, who raised his FY20 to FY22 earnings per share (EPS) forecasts by 5% to 11.1% to account for higher-than-expected ASPs from 3Q20 onwards, the new glove plant with 1.4 billion pieces per annum capacity, and longer order book visibility.

“Our current ASP assumptions for FY20/21/22F are +18%/+10.5%/-10% vs. +16%/+9.6%/-10% previously,” said Aw.

He added that in tandem with his hike in EPS forecasts for Kossan, the rubber glove manufacturer’s TP has been upped to RM16.40, from RM15 previously, noting that this new TP is still based on 22 times calendar year 2021 (CY21) price to earnings (P/E) ratio in line with its five-year historical mean. He has maintained his "buy" call.

He noted that Kossan remains attractive given its laggard play in the glove sector, trading at a 36% discount to the Malaysian glove sector average CY21 P/E ratio of 34 times, in spite of it standing to benefit from the sector’s favourable supply-demand dynamics in light of Covid-19.

“Potential re-rating catalysts include stronger-than-expected margin expansion for its glove division, and higher-than-expected rise in ASPs. Downside risks: discovery of a cure/vaccine for Covid-19, stiff pricing competition, and spike in raw material prices,” he told clients via a note today.