Investment Highlights

• We maintain our BUY call on Kossan Rubber Industries (Kossan) with a higher fair value of RM5.61 (from RM5.28 previously). Our valuation is based on a P/E of 25x FY21F EPS as we roll over from FY20F EPS.

• We raise our earnings forecast for FY20F and FY21F by 11.2% and 0.5% respectively to account for higher expected demand from the Covid-19 outbreak. We introduce our FY22F earnings forecast of RM309.4mil.

• Kossan’s FY19 core net profit of RM227.3mil (+13.2% YoY) was in line with both our and street’s estimate, accounting for 102% and 101% of our and street’s full-year earnings forecasts respectively.

• Kossan’s FY19 top line grew 3.6% YoY to RM2,221.6mil while PBT margin improved 1.0ppt to 12.3%. (segmental breakdown in Exhibit 1).

• The glove division’s revenue rose 4.7% YoY to RM1,964.2mil in FY19 and recorded a PBT margin of 12.7% (+1.1ppt) on the back of strong demand growth for Kossan’s glove products. This was underpinned by a 7.8% YoY increase in sales volume.

• Selling prices dropped 4–6% in FY19 as nitrile-based rubber price fell 10–12%. Latex price increased by 4–6% YoY while the MYR weakened by 2.5% against the USD. The split of nitrile gloves against natural rubber is now at 79:21.

• Production capacity was boosted by Plant 17 (1.5bil pieces, +6%), which was commissioned in November 2018. Further adding to production capacity was Plant 18 which was fully commissioned in November 2019 (2.5bil pieces).

• Comparing 4QFY19 against 3QFY19, the glove segment’s revenue climbed 9.9% to RM512.0mil. PBT soared 22.1% while PBT margins grew 1.3ppt to 12.9% as nitrile and natural rubber prices slipped by 3–5% and 1-3% respectively. Sales volume expanded 7.6% QoQ in 4QFY19.

• The improved performance was on the back of a lower base in 3Q due to a labour shortage at the time. Recall that there were strict regulatory issues in hiring foreign workers in 3Q which resulted in a 1–3% lower sales volume as production slowed down. However, the problem was resolved in 4QFY19.

• Kossan’s technical rubber product (TRP) division

experienced lower sales deliveries in FY19 resulting in a 1.9% YoY decline in revenue and 2.1% decrease in PBT but PBT margin was flattish at 15.1%. Comparing 4QFY19 with 3QFY19, its revenue slid 3.6% and PBT dropped 40.1% while PBT margin shrank 6.6ppt to 10.9%. The decline was due to different stages of completion of construction projects.

Source: AmInvest Research - 24 Feb 2020