• Kossan’s 1QFY17 net earnings of RM46.5m is below our’s and consensus expectation, making up 21.5% of our full year forecast (Consensus: 20.5%).

• Despite a 7.5% increase in sales quantity, 1Q net earnings is 9.3% lower due to higher raw material costs.

• Earnings expected to improve in the next quarter due to additional capacity and improving market condition.

• We maintained our FY17 and FY18 earnings forecast and our target price is unchanged RM7.80. Maintain a BUY.

Latex price peaked, but declining.

1QFY17 earnings fell by 9.3% mainly due to high latex cost in January 2017 (reaching its 5-year peak of RM8.18/kg). Nonetheless, the situation has reversed as latex price is on downtrend – averaging RM6.40/kg to RM6.50/kg in the past 1 month.

Running at full capacity.

Presently, Kossan has a production capacity of 22bn pieces of gloves per annum and with all the plants operating at almost full capacity. The company is currently constructing one new plant at Jalan Meru, Selangor, which is capable of producing 3.0bn pieces of glove per annum. Construction work has started in May 2016 and is expected to complete by 3QFY17. Beyond that, Kossan will build 2 more new plants with total capacity of 4.5bn pieces of glove per annum at Klang, Selangor. Construction will begin by 1H2017 and is expected to complete by mid to end 2018.

Maintaining our forecasts.

We expect earnings will improve in the next quarter due to softened raw material costs (-20% since January). Meanwhile, we believe ASP will likely remain stable due to less fluctuation between USD and ringgit exchange. Hence, we are maintaining our FY17 and FY18 earnings forecasts respectively at RM216.6m and FY237.6m, as we expect earnings to catch up in the remaining quarters of the year.

Valuation and recommendation.

Our target price is unchanged at RM7.80 based on PER of 23x and we maintain our BUY recommendation on Kossan.

Source: BIMB Securities Research - 26 May 2017