Investment Highlights

• We maintain our HOLD recommendation with a slightly higher FV of RM 3.89/share (vs. RM3.82/share previously) after introducing Kossan’s FY21F net profit forecast of RM287.9mil. Our fair value for Kossan is based on DCF, which has a WACC of 6.7% and terminal growth of 2.5%. At our FV of RM3.89/share, the implied FY20 P/E is 20.4x with FY19F-FY22F earnings CAGR of 8.1%.

• FY18 net profit of RM200.7mil (9.3% YoY) met both our and street’s estimates, accounting for 96.7%–97.8% of full-year forecasts respectively.

• Key highlights of Kossan’s FY18 results include: 1. FY18 topline grew 9.5% YoY to RM2,144.2 mil (Gloves: +9.3% YoY and TRP +14.0%) due to a strong demand growth where sales volume increased 9.7% YoY. Kossan’s gloves’ ASP improved 6.1% YoY in terms of USD. However, this was dragged by a 6.2% strengthening of the MYR against the USD. 2. Comparing FY18 against FY17, Kossan’s EBITDA rose 10.5% to RM 345.8mil. Despite the 9.7% increase in sales volume, EBITDA margin only improved marginally by 0.1ppt due to higher costs. This was attributed to the higher natural gas prices which climbed by 22.8% YoY coupled with higher nitrile rubber price which increased 9.3% YoY.

• Kossan’s product mix has shifted further towards nitrile with a nitrile-to-natural rubber split of 75:25 (70:30 previously). We believe Kossan will be facing some margin pressure stemming from heightened competition in the nitrile space as the big rubber glove producers ramp up their nitrile gloves capacity expansion (+14% in FY19). We anticipate Kossan’s EBITDA margin to remain around similar levels of circa 16.0% in FY19F.

• Kossan’s Plant 18 (2.5bil pieces) is expected to be commissioned by 2QFY19 while Plant 19 (3bil pieces) is expected to be commissioned by 4QFY19. Kossan’s total production capacity is expected to reach 32bil pieces by end-FY19 (26.5bil pieces currently).

• The next phase for Kossan’s expansion will be in Bidor, Perak. Construction of the plant will start in FY20F and be completed in eight years’ time.

Source: AmInvest Research - 19 Feb 2019