• Kossan’s 1HFY17 net earnings of RM92m is below our and consensus expectation, making up 43% of our full year forecast (Consensus: 44%).

• Despite a 21.4% increase in revenue, 1H net earnings is 0.2% lower due to weaker performance in Technical Rubber Product (TRP) Division.

• We expect earnings to improve in 2H due to lower raw material price, improving demand and additional capacity.

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

Stronger earnings from glove division.

Kossan’s 1H earnings fell marginally by 0.2% due to weak results in 1QFY17 (due to high raw material price) and weaker performance in TRP division (1HFY17 PBT fell by 44%). Nonetheless, Glove division’s PBT was 24% higher yoy (qoq: +5.1%) to RM52.6m as a result of higher sales volume (+5.8% yoy) and better ASP (+12.8% yoy).

Additional capacity.

With the completion of Plant 16 in July 2017, Kossan’s production capacity will increase by 3bn pieces per annum to 25bn pieces per annum. Additionally, Kossan will build 2 more new plants (P17 & P18) with total capacity of 4.5bn pieces of glove per annum at Klang, Selangor. Construction of the new plants has begun and is expected to complete by 2018.

Expect stronger 2H, maintaining our forecasts.

We expect earnings will improve in the next quarter due to softened raw material costs (current price is more than 30% lower since January 2017), improving demand and additional capacity from Plant 16. 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.

Rolling over to FY18, our target price is increased to RM8.18 from RM7.80 based on PER of 22x and we maintain our BUY recommendation on Kossan.

Source: BIMB Securities Research - 25 Aug 2017