Investment Highlights

• We maintain our HOLD recommendation with a slightly lower FV of RM3.82/share. We have trimmed Kossan’s FY18F, FY19F and FY20F earnings forecast by 5.3%, 3.9% and 3.9% respectively to account for a lower EBITDA margin assumption. Our fair value for Kossan is based on DCF, which has a WACC of 6.5% and terminal growth of 2.5%. At our FV of RM3.82/share, the implied FY19F P/E is 20x with 3-year earnings CAGR FY19F-FY21F of 8.6%.

• 9MFY18 net profit missed our expectations, accounting for only 65% and 68% of our and street’s full-year forecast respectively. The variance against our forecast came largely from a lower-than-expected EBITDA margin of 15.9% compared to our assumption of 17.3%.

• Key highlights of Kossan’s 3QFY18 results include:
  1. 9MFY18 topline grew 15.5% on the back of higher growth across all its divisions. Revenue for Kossan’s gloves division expanded 4.3%, technical rubber products increased 12.1% and the cleanroom division rose 8.1%. The growth in its gloves division was on the back of improved ASP (7.7%) as well as higher production capacity which resulted in higher volume sold (7.7%).
  2. Overall EBITDA climbed 6.0% YoY to RM246.5mil in 9MFY18. However, Kossan’s EBITDA margin improved marginally by 0.2ppt from 15.7% in 9MFY17 to 15.9% in 9MFY18. This was attributed to a higher ASP and decline in natural rubber prices (29.7%) but offset by increase in average natural gas cost (22.5%) and nitrile prices (8.5%).
  3. Kossan’s strong results were underpinned by the full commissioning of its Plant 16 in August 2018 and increased sales deliveries in its technical rubber products division. Plant 16 has an annual capacity of 3bil pieces.

• Kossan’s production capacity will continue to rise as it has fully commissioned Plant 17 (1.5bil pieces) in November 2018. This brings total capacity to 26.5bil pieces per annum. The company has also started construction works for Plant 18 (+2.5bil pieces) and Plant 19 (+3bil pieces), which are expected to be fully commissioned by 2QFY19 and 4QFY19 respectively.

• Moving forward, we expect robust sales volume growth of 19% in FY19F from the higher capacity. However, the topline growth will be offset by a downward pressure on ASP as competition heightens. Kossan’s competitors, Top Glove and Hartalega, will be introducing additional capacity of circa 9bil pieces each by FY20F as shown in Exhibit 2.

Source: AmInvest Research - 19 Nov 2018