CGS-CIMB lowers Kossan’s target price to RM7.64 as ‘stellar earnings forecast’ for FY21-23 unsustainable in long run

KUALA LUMPUR (Jan 15): CGS-CIMB has maintained Kossan Rubber Industries Bhd to “add” at RM4.26, but lowered its target price (TP) to RM7.64 from RM9.16 previously.

In a note today, CGS-CIMB analyst Walter Aw said he made no changes to his financial year ended Dec 31, 2020 (FY20) to FY22 forecast earnings per share (EPS) and retained his “add” call with the lower TP, which is based on 15 times 2022 estimated price-to-earnings (P/E), from 18 times previously, and was pegged to its previous five-year historical mean.

The analyst noted that while he expected stellar earnings from its FY21 to FY23, thanks to continued high demand and higher average selling prices (ASPs), the forecast earnings are likely to be unsustainable in the long term.

However, he noted that “we continue to like Kossan for its strong earnings prospects (three-year EPS compound annual per growth of 79.6%) as it stands to benefit from the favourable supply-dynamics in the glove sector owing to Covid-19″.

According to Aw, Kossan’s current valuation has yet to reflect its potential earnings as well as its solid dividend yields.

Notably, Kossan is not discounting the possibility of a special dividend on top of its current dividend payout (minimum 30% of net profit) to reward shareholders due to Covid-19-led demand.

“Kossan stated that the possible implementation of interim dividends is on the cards, in line with the recent announcement of its peers, Supermax and Top Glove,” said Aw, noting that he only inputted a 40% dividend payout for FY20-22F and reflecting dividend yields of 3.8-8.2%.

The analyst also pointed out that Kossan had increased its ASP by 40% quarter-on-quarter in 3Q20 and the demand-led environment will allow it to raise them further.

“In a recent briefing, Kossan said it expects an ASP increase of 50% quarter-on-quarter in fourth quarter 2020 (4Q20) as well as in first quarter of 2021 (1Q21F),” said Aw.

“The company also highlighted that it is not discounting further ASP hikes from 2Q21F onwards, given that its current ASPs are still below the industry average,” he added.

Last year, Kossan had halted 25% of its total production capacity from Dec 7 to 31 after a Covid-19 outbreak among its employees where 990 cases were detected among its 7,000 workers.

“We estimate the capacity loss at 1.5% of Kossan’s total annual output, and that the financial impact was minimal as we believe the quantum of its ASP hikes would be more than sufficient to offset the temporary capacity loss during the period.”

In terms of global glove demand, Kossan continues to witness strong global glove demand owing to Covid-19.

“We understand that its capacity has been fully taken up until end-CY21F and that it is already receiving orders for 1Q22F,” said Aw.

He added Kossan has also fully filled up its allocation for spot orders, which utilise up 15-20% of its total capacity, till end-1Q21F.

As at 11.25am, Kossan’s shares were down 2 sen or 0.47% to RM4.24, with 10.08 million shares traded. The group had a market capitalisation of RM11.03 billion.

Source: TheEdgeMarkets