It is certainly not hard to fathom why Kossan Rubber Industries Bhd, one of the big four glove makers in the country, has clinched two The Edge Billion Ringgit Club (BRC) awards.
One is for highest return on equity and the other is for the highest growth in profit after tax (PAT) over three years from 2018 to 2020 among companies with a market capitalisation of between RM1 billion and RM40 billion in the healthcare sector.
The sudden spike in global demand for personal protective equipment, including disposable rubber and nitrile gloves, as a result of the Covid-19 pandemic put Kossan in a high growth era in 2020 that was unprecedented.
Given its record-breaking performance boosted by a swelling sales volume and rising average selling price (ASP), Kossan achieved a three-year compound average growth rate of 81.4% in PAT, a rate that is higher than that of bigger players.
Kossan’s PAT was already on an upward trend even pre-pandemic, although the increase was not as sharp. The glove maker posted a PAT of RM199.77 million in FY2018, a 9.7% growth from RM182.06 million a year ago. Its earnings grew further to RM224.65 million in FY2019 as revenue grew 3.6% year on year to RM2.22 billion from RM2.14 billion.
Its earnings growth in FY2020 was exponential. Kossan’s PAT surged almost five times to RM1.09 billion on revenue of RM3.64 billion — a quantum leap that it has not had before.
The big jump on PAT enabled the company to obtain a whopping return on equity (ROE) of 57.1% in FY2020, from a decent rate of 16.2% in FY2018 and 16.4% in FY2019. This translates into an adjusted weighted ROE of 36.7% over the three years — the highest among the companies listed in the healthcare sector of Bursa Malaysia.
Kossan shareholders got to enjoy the bumper profit instantly. The rubber glove manufacturer declared a dividend per share of 14 sen in FY2020, up from three sen in FY2018 and FY2019.
On top of that, Kossan undertook a one-for-one bonus issue in FY2020, the second time it has done so in seven years.
As its profit kept rising, Kossan has raised its dividend to 36 sen per share for the nine months ended Sept 30, 2021 (9MFY2021) — the highest so far.
On its prospects, Kossan says demand for gloves has eased while ASP has been declining gradually, with the ongoing vaccinations and higher vaccination rates recorded in developed and developing countries, and falling number of severe Covid-19 cases.
According to Bloomberg, 11 research analysts who cover Kossan have rated “hold” calls, versus eight “buy” calls and two “sell” recommendations. The average target price is RM3.52.
CGS-CIMB Securities wrote in its Oct 22 quarterly results review: “We keep our ‘add’ call on Kossan in view of its attractive valuations (it is trading at a 17.8% discount to Kossan’s five-year mean of 16 times), its strong balance sheet (net cash of RM2.5 billion as at end-9MFY2021, 43% of the current market cap), and the inelastic global demand for gloves in the long run.”
Even so, the research outfit has slashed its target price to RM3 in tandem with earnings-per-share cuts on projected weaker quarter-on-quarter (q-o-q) results in FY2022 and FY2023.
The anticipated weaker q-o-q results were on the back of declining ASPs and lower sales volume, owing mainly to aggressive expansion plans from new and existing glove producers, less aggressive buying patterns of customers and lower spot orders, the research house said.
Meanwhile, AmInvestment Bank Research — which has a “hold” call on the counter, with a lower fair value of RM2.55 compared with RM3.06 previously — wrote that while the upside for Kossan is capped as the ASP downtrend continues, the downside is limited, as its share price has fallen below the pre-pandemic level of RM2.45, which was last recorded on Jan 31, 2020. As at 12.30pm on Dec 6, it was RM1.93.
“As Kossan’s capacity has expanded with a much stronger balance sheet, we believe our valuation is fair, as its fundamentals remain intact,” it said in an Oct 22 note to clients.