CGS-CIMB Research expects Kossan to record stronger earnings for 2HFY20

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KUALA LUMPUR (Sept 7): CGS-CIMB Research is expecting glove maker Kossan Rubber Industries Bhd to record stronger earnings for the second half of the financial year ending Dec 31, 2020 (2HFY20), backed by higher average selling prices (ASPs), an increase in production capacity as well as higher economies of scale.

The research firm said it remains positive on Kossan post its briefing earlier as the group aims to take a more aggressive stance in 2HFY20, with plans to raise its ASPs by 25% quarter-on-quarter (q-o-q), followed by a 45% q-o-q increase in the fourth quarter ending Dec 31, 2020 (4QFY20).

“Based on our estimates, Kossan's ASPs will continue to lag its peers’ even post the planned increases. Note that we have pencilled in ASP increases for FY20/21/22 of +18%/+10.5%/-11%,” said CGS-CIMB Research analyst Walter Aw in a note on Saturday. 

Meanwhile, for raw materials, Aw said the group expects a rise in nitrile butadiene (NBR) prices (45%-50% of total cost) given the current supply shortage.

“However, we gather that Kossan is not overly concerned [about the expected rise of 5-10% monthly up to December 2020] as the quantum of ASP hikes will more than offset the cost increases,” he said.

CGS-CIMB retained its earnings per share (EPS) estimates for Kossan, with an "add" call at RM13.40 and an unchanged target price (TP) of RM17, based on 22 times calendar year 2021 (CY21) price-earnings ratio (PER) in line with its five-year historical mean.

“In our view, Kossan remains attractive as a laggard play in the glove sector, trading at a 36% discount to the Malaysian glove sector average CY21F (forecast) PER of 34 times despite the stock standing to benefit from the sector’s favorable supply-demand dynamics owing to Covid-19,” Aw noted.

At 10.52am, shares in Kossan were unchanged at RM13.40, valuing the group at RM17.11 billion. It saw some 439,100 shares traded.

Surin Murugiah