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Need for gloves: Kossan expects the acute global shortage of gloves to persist, given the rising severity of the pandemic and limited new supply.

PETALING JAYA: The higher average selling price (ASP) of rubber gloves during the Covid-19 pandemic has analysts upbeat about Kossan Rubber Industries Bhd’s earnings.

TA Securities analyst Tan Kong Jin, who is reiterating a “buy” call on the stock with a target price of RM10.30, said for its upcoming third quarter (3Q) 20 results, the brokerage expects the company to post another record net profit of more than RM300mil with significant earnings growth of more than 100% quarter-on-quarter (q-o-q) and year-on-year (y-o-y).

Kossan Rubber is scheduled to release its 3Q results on Nov 19. Tan attributes this to the higher sales volume of around 10% and higher ASP of 30%.

Subsequently, the research house also expects the company’s 4Q20 net profit to jump significantly to more than RM650mil on the back of the higher ASP, which is expected to rise by more than 45% q-o-q.

“We expect financial year (FY) 2020 net profit to surge by 417.2% to RM1.16bil, which is significantly higher than the consensus estimates. Our FY20 earnings projections suggested that Kossan’s earnings would be back-end loaded this year.

“This is true after observing the rise in ASP from June-20 onwards while the ASP in first half was flat. In our assumptions, we project FY20-FY21 ASP to increase by 36.8% and 22% respectively before decreasing by 35% in FY22, ” Tan said.

This is based on the assumption of a significant growth in ASP in 3Q20 and 4Q20, the elevated 4Q20 ASP to sustain into the first half of 2021 before moderating in 2H21 and FY22 before declining to US$24.2 per 1000 gloves.

The earnings upside to the FY21 estimates would be high if there are still no Covid-19 vaccines available by the end of this year, which would suggest that the glove ASP may continue to rise and the FY21 earnings may be underestimated.

Meanwhile, CGS-CIMB analyst Walter AW is reiterating its “add” call on the counter with a target price of RM8.50.

Kossan’s 1-for-1 bonus issue went ex on Oct 12 following the issuance of 1.3 billion bonus shares, bringing its total share base to 2.6bil.

“While this does not bring any changes to Kossan’s underlying fundamentals, we are positive on the bonus issue as we believe it will help enhance the marketability and trading liquidity of Kossan’s stock, ” he said.

The company continues to witness strong global glove demand due to the Covid-19 outbreak and has an order book visibility of up to end of the first half of next year. Kossan expects the acute global shortage of gloves to persist, given the rising severity of the pandemic and limited new supply. “Hence, it will take a more aggressive stance in the second half of the year, with plans to raise its ASP by 25% q-o-q in 3Q20, and 45% q-o-q in 4Q20.

“Based on our estimates, Kossan ASPs will continue to lag behind its peers even after the planned hikes, ” he added.

https://www.thestar.com.my/business/business-news/2020/10/21/rising-glove-prices-spell-good-news-for-kossan

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