KUALA LUMPUR (Aug 26): Kossan Rubber Industries Bhd was among Bursa Malaysia's top gainers in morning trade today after reporting its highest-ever quarterly profit for the second quarter ended June 30, 2020 (2QFY20).
At 10.49am, shares in Kossan were 22 sen or 1.5% higher at RM14.86, bringing the market capitalisation of the group to RM18.72 billion. It saw some 2.2 million shares traded.
MIDF Amanah Investment Bank Bhd and CGS-CIMB Research said Kossan's results for the first half ended June 30, 2020 (1HFY20) were slightly above their expectations as both research firms expected a stronger upcoming quarter on the back of higher sales volume and a substantial increase in average selling prices (ASPs) due to Covid-19.
Both research houses also raised their target prices (TPs) for Kossan to above RM15.
MIDF Amanah Investment Bank said Kossan's 1HFY20 core net earnings of RM130.8 million were slightly above its expectations at 45.3% of its full-year estimate.
Its analyst Ng Bei Shan said earnings estimates for the glove maker were also revised by 49%/25% for FY20 and FY21 respectively, adding that the research firm imputed higher ASPs as demand would likely remain strong at least in the next two quarters, driven by a high number of active Covid-19 cases globally.
The analyst maintained the ‘neutral’ rating of Kossan with a higher TP of RM15.35 from RM12.32 previously.
“Our TP is based on an unchanged PER (price-earnings ratio) of 32 times, which is +2SD (standard deviation) of its three-year mean, given the likely bumper earnings ahead, pegged at FY21F EPS (forecast earnings per share) of 48 sen. While we think that earnings will be much stronger for the upcoming quarter, we believe that the capital upside may be limited in the near term as the bright outlook is likely to have been priced in at this juncture.
“Besides, valuation is at the higher end of the range. Downside risks include a plunge in ASPs due to a shift in supply-demand dynamics, a hike in raw material prices and disruption to operations. On the other hand, higher-than-expected ASPs of gloves may continue to drive earnings higher,” Ng added in a note today.
Meanwhile, CGS-CIMB Research raised its TP for Kossan to RM17 (from RM16.40) based on 22 times calendar year 2021 forecast (CY21F) PER (five-year historical mean).
“We continue to like Kossan as a laggard play in the glove sector as its ASPs, among the lowest in the industry, should catch up with its peers' in the coming quarters. It is currently trading at 19.3 times CY21F PER, a 21.8% discount to the Malaysian glove sector’s weighted average CY21F PER of 24.7 times,” said CGS-CIMB Research analyst Walter Aw in a note today.
Edited by Joyce Goh