Kenanga maintains 'outperform' on Kossan
KUALA LUMPUR: Going by recent share price movements, investors may be having an overly bearish reaction to an expected decline in Kossan Rubber Industries Bhd's average selling prices (ASP) in the coming quarters.
According to Kenanga Research, the anticipated ASP weakness is already discounted in the share price, which stood at RM3.29 at Tuesday's close, having lost about a quarter of its value so far this year.
The research house has an "outperform" recommendation on the glove player, although it lowered its target price to RM5 from RM5.84 previously given a revision of its earnings projection.
Kenanga cut FY21 net profit forecast by 8% as it factored in a lower utilisation rate of 90% from 98% previously. It however kept its FY22 projection with an ASP assumption of US$40 per 1,000 pieces.
In its most recent report, Kenanga highlighted that Kossan is confident of strong demand being sustained with orders lined up to end-2021 while capacity ramp-up is on track to commence gradually, staggered throughout October to December.
For 1HFY21, Kossan's core Patami of RM2.18bil was below expectation at 59% and 66% of Kenanga's and consensus full-year estimates due to lower-than-expected volume sales.
A second interim dividend per share (DPS) of 12 sen brought 1HFY21 DPS to 24 sen, which was within Kenanga's expectation.
Over the short- to medium-term, the research house expects gloves players to benefit from the weakening of the ringgit against the US dollar.
Year-to-date average US-ringgit exchange is RM4.11 compared to the current RM4.23.
"Since sales are USD-denominated, theoretically, a depreciating ringgit against the dollar will lead to more revenue receipts for glove makers," said Kenanga.
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