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Author: PublicInvest   |   Latest post: Fri, 13 Dec 2019, 10:07 AM

 

Kossan Rubber Industries Berhad - Lifted By Margin Expansion

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Kossan’s reported a better set of results for 1QFY19, with a 31.9% YoY increase in net profit to RM58.7m. The results were broadly in line with ours and street’s estimates, at 26.7% and 24.9% respectively. In our universe of coverage, only Kossan has managed to deliver a satisfactory and positive quarterly performance. All segments of Kossan posted stronger earnings in 1QFY19. TRP division’s PBT was up 35% YoY, gloves segment’s PBT up 43% YoY and cleanroom segment’s PBT up 38% YoY. Rolling forward our valuation to FY20F, we raise our TP to RM4.30 (from previous TP of RM3.50), based on an unchanged PE multiple of 21x. Given an upside potential of 13%, we upgrade Kossan to Trading Buy instead of an outright buy as we are not expecting its Bidor integrated plant to generate meaningful earnings in the near term, perhaps only in FY22F.

  • Gloves. Kossan’s gloves division saw a 7.1% YoY increase in its revenue, to RM497m this quarter. The growth was supported by higher glove sales (+18.8% YoY) and increased production capacity from Plant 17 (+1.5bn pcs pa) as it was fully commissioned in November 2018. Despite the higher revenue, ASP fell c.3-5% YoY and we attribute this to lower raw material prices and foreign exchange fluctuations. Blended ASP now hovers around USD 22-24 per thousand pcs of gloves. PBT margins for the glove segment improved to 13.7% in 1QFY19, from 11.3% in 1QFY18. We believe the margin improvement is the fruit of Kossan’s continuous cost savings effort while price competition in the industry does not seemed to have affected Kossan as much as its peers.
  • Expansion plan. Target full commission of Plant 18 (+2.5bn pcs pa) has been pushed back to 3QFY19 from the initial target of 2QFY19. As for Plant 19 (+3.0bn pcs pa), the target full commission date remain unchanged, by 4QFY19. Full commissioning of these two plants will boost Kossan’s installed capacity by c. 20%, to 32bn pcs pa. Production capacity from Plant 18 and 19 should be sufficient to support Kossan’s growth in FY20-21F.
  • Integrated manufacturing complex in Bidor. Land clearing work on the piece of Bidor land will begin in September 2019, to make way for its integrated manufacturing facility. It will take approximately 9 months to complete with the land clearing work and once completed, Kossan should be able to proceed with the constructions of plants. We understand that basic infrastructure like roads and flyover bridges are already being constructed. The entire expansion in Bidor will take some 8 years to complete.

Source: PublicInvest Research - 27 May 2019

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