Investment Highlights

• We maintain our HOLD recommendation on Kossan Rubber Industries (Kossan). We have changed our valuation method from DCF to P/E valuation based on an FY20F P/E of 18.8x with a higher FV of RM4.10 (previously RM3.89). Our PE multiple is based on Kossan’s average 1 year forward PE.

• Kossan’s 1QFY19 net profit of RM58.7mil (+31.9% YoY; -1.3% QoQ) met both our and street’s estimates, accounting for 24.1%–24.9% of full-year forecasts respectively.

• Key highlights of Kossan’s 1QFY19 results include:

1. Kossan’s 1QFY19 topline grew 16.0% YoY to RM561.5mil (TRP +7.1%; gloves +18.5%; cleanroom -16.0%) as shown in Exhibit 1 while PBT margin improved 2.4ppts to 13.4% (TRP +2.4ppts; gloves: +3.0ppts; cleanroom +1.3ppts). Comparing 1QFY19 with 4QFY18, the group’s topline shrank 4.7%. On the other hand, PBT rose 5.2% QoQ largely driven by improved margins in its gloves business.

2. On a YoY basis, Kossan’s technical rubber product (TRP) division enjoyed higher sales deliveries, sales of higher margin products and favourable raw materials prices. These were as mainly due to an increased demand from the infrastructure sector.

3. However, its performance contracted slightly compared with 4QFY18 with a 7.34% decline in revenue and 19.5% contraction in PBT. The QoQ fall was mainly due to lower sales deliveries and increase in raw material prices (SMR10 +8.2%).

4. The glove division’s improvement was on the back of continued strong demand with an 18.8% YoY increase in sales volume as production output increased and the MYR weakened by circa 4.8% YoY against the USD. However, this was offset by a 3–5% decline in ASP.

5. Comparing 1QFY19 against 4QFY18, revenue eased 4.3% largely on the back of a 5–7% drop in ASP in spite of a 4.7% rise in sales volume. PBT climbed 8.7% to RM68.0mil in 1QFY19 on the back of lower raw material prices (nitrile - 6- 9%; natural rubber - 9-11%).

6. Comparing 1QFY19 against 1QFY18, Kossan’s EBITDA rose 37.0% to RM 102.9mil while EBITDA margin improved by 2.8ppts. This was attributed to lower raw material prices (-1% nitrile rubber and -8–10% natural rubber) coupled with a better product mix (nitrile:natural latex is 78:22).

• Going forward, we believe that Kossan will be facing margin pressures from heightened competition in the nitrile and natural rubber space as the big rubber glove producers plan to ramp up their nitrile gloves capacity expansion (+14% in FY19). Also, there are plans to raise latex gloves’ supply to 30bil pieces (from circa 17bil) by 2022 by Thailand-based Sri Trang. We anticipate Kossan’s EBITDA margin to be 16% each in FY19F and FY20F.

• Kossan’s Plant 18 (2.5bil pieces) is expected to be fully commissioned by 3QFY19 while Plant 19 (3bil pieces) is expected to be fully 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 - 27 May 2019