KUALA LUMPUR (July 27): Kossan Rubber Industries Bhd's share price rocketed 21.01% or RM2.90 to an all-time high of RM16.70. Its market capitalisation ballooned to RM21.36 billion, more than Telekom Malaysia Bhd's market cap of RM14.98 billion.
Kossan took the centre stage as analysts were raising earnings forecasts after an analyst briefing last week.
The frenzied buying interest in the stock was driven by the optimism that the rubber glove maker, like its peers, would post record-breaking earnings in the current financial year ending Dec 31, 2020 (FY20) and the year after. More importantly, it is expanding quickly to ride the strong global demand growth.
The resurgence of new Covid-19 cases in an increasing number of countries in recent weeks continues to fuel interest in rubber glove makers globally, including Kossan.
CGS-CIMB Research forecast Kossan's net profit to swell to RM941 million in FY21, this would be the highest ever recorded since its listing in 1996.
It expects its net profit to more than double to RM617 million for the current financial year from RM224.78 million in FY19. However, its net profit will retreat to RM551 million in FY22 after the record-high profit, according to CGS-CIMB's note to clients.
The earnings upgrade hinges on higher-than-expected average selling price (ASP) from the third quarter of 2020 onwards, the new glove plant with a capacity of 1.4 billion pieces per annum, and longer order-book visibility.
Given the higher EPS forecasts, the stockbroking firm upped its target price (TP) to RM16.40, from RM15 previously.
CGS-CIMB 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.
Hong Leong Investment Bank Research Analyst Farah Diyana Kamaludin is forecasting Kossan's FY20 net profit to come in at RM580.1 million, with its FY21 net profit increasing to RM734.4 million, and retreating to RM558.9 million for FY22.
She maintains her "buy" call on the counter, while raising her TP to RM17.75, from RM16.37 previously.
Meanwhile, AmInvestment Bank Research's Nafisah Azmi raises her fair value on Kossan to RM15.74, from RM12.51 previously with the new valuation based on a PE multiple of 27 times FY21 EPS.
"We raise our earnings forecasts by 7% for FY20F, 26% for FY21F and 22% for FY22F. This is to account for higher assumptions of ASP and sales volume. We increase our assumption for ASP to US$29 (previously US$28) in FY20F and FY21F. We also raise our assumption for sales volume by 5% for FY21F and 14% for FY22F," she noted.
Nafisah anticipates Kossan's net profit to be at RM671.4 million for FY20, RM745.5 million for FY21 and RM573.4 million for FY22.
Meanwhile, Kenanga Research's Raymond Choo commented that anecdotal evidence suggests a further rerating as Kossan is expanding capacity more aggressively compared to the past conservative approach. "This potentially could fuel a potential further PER rerating," he added.
Choo expects Kossan to achieve a net profit of RM682.1 million for FY20 and RM811.9 million for FY21.
During last week's briefing, the rubber glove maker told analysts that its current annual capacity was 29 billion pieces. However, 10 production lines would commence operations at its Plant 19 next month as planned. As a result, Kossan would have a total capacity of 32 billion pieces by year end, with an additional 1.4 billion pieces with lines by the first half of 2021 (1H21).
Its recent land purchase in Meru, Klang would add production as early as 2H21, with six lines that would produce two billion pieces.
Consequently, Kossan's total capacity in FY21 would reach 35.42 billion pieces, an increase of 10.5% year-on-year.