KUALA LUMPUR (Nov 10): After posting a strong set of results for the third quarter ended Sept 30, 2020 (3QFY20), analysts expect Kossan Rubber Industries Bhd to record even stronger earnings for the next quarter (4QFY20), in tandem with rising average selling prices (ASPs) of gloves.
Net profit for the glove maker’s 3QFY20 surged 609% to RM348.74 million from RM49.18 million for the previous corresponding quarter, thanks to higher sales volume and selling prices as demand for rubber gloves continued to outstrip supply amid the Covid-19 pandemic.
Quarterly revenue jumped 95% to RM1.03 billion from RM531.26 million for 3QFY19. For the cumulative nine-month period ended Sept 30, 2020 (9MFY20), Kossan's net profit more than tripled to RM544.6 million from RM163.78 million for the year-ago period, while cumulative revenue grew 43% to RM2.35 billion from RM1.64 billion previously.
RHB Research Institute maintained its "buy" call for the stock with a higher target price (TP) of RM9, noting that the group’s expansion plans remain intact, with its capacity already up by 10% to 32 billion pieces per year, with a further addition of 1.5 billion pieces with the construction of Plant 20, which is due to be fully commissioned by the first half of 2021 (1H21).
The research house added that Kossan also stands a chance to join the FBM KLCI next month if it maintains its current market capitalisation of around RM17.6 billion.
“We increase our FY20-22 earnings [forecasts] by 91%-160% to reflect higher ASPs, in line with the industry trend. The higher TP is in line with better earnings estimates. In the near term, we expect Kossan to register a stronger set of results for 4QFY20, in line with the industry’s higher ASP trend. In the long run, Kossan is a beneficiary of a long-term global uptrend in glove consumption,” said RHB analyst Alan Lim.
Despite a strong set of results, the stock had fallen 8.27% or 62 sen to RM6.88 as at the time of writing today, in tandem with other glove counters which topped the loser list on Bursa Malaysia this morning as news of Pfizer’s Covid-19 vaccine candidate dominated the market’s optimism about ending the global pandemic and reopening the economy. Still, year to date, the stock has enjoyed a bull run with a 227% leap.
On another note, the fresh development of the potential vaccine could hamper Kossan’s share price in the near term, noted PublicInvest Research.
“Nonetheless, we think that it would still take about two years to have the entire global population vaccinated upon the roll-out of a vaccine, therefore any short-term price weakness would be an opportunity for investors to accumulate,” it said in a note today, upgrading its call for the stock to "trading buy" with a higher TP of RM9.40.
AmInvestment Bank, on the other hand, maintained its "hold" call for the stock with a lower fair value (FV) of RM7.07.
“We like Kossan as it is one of the biggest glove producers to benefit from the Covid-19 pandemic due to its expansionary plans and efforts in improving quality and operational efficiency. However, we believe that the stock is fully valued with a price-earnings ratio (PER) of 29 times [forecasted] FY22 earnings per share (EPS),” said AmInvestment Bank analyst Thong Pak Leng.
Thong noted that Kossan’s capacity had been fully taken up until end-2021, while still receiving orders for 2022.
“Around 10%-15% of its total capacity has been allocated for spot orders. Management indicated that incoming capacity will be directed to short-term orders,” he said.