• Kossan’s FY17 earnings of RM183.9m was in-line with our and consensus expectations, making up 96% and 95% respectively.

• FY17 earnings improved 10.1% yoy on higher sales, greater efficiency in production and effective cost control.

• We remain upbeat on Kossan’s long term outlook. Additional capacity from plant 16 (+14%) is expected to contribute to FY18 earnings growth.

• Downgrade Kossan to HOLD recommendation with unchanged TP of RM9.10 based on PER 25x (3-years historical average) on FY18 EPS.

Stronger FY17 sales from glove division.

Kossan’s FY17 revenue grew 17.4% yoy to RM1.7bn attributed to increase in sales especially from glove division (+19.2%). This increase was mainly due to i) higher ASP (+7%) arising from increase raw material prices (NR +30%, NBR +14.1%) and ii) higher volume sold (+6%). In tandem, earnings grew 10.1% yoy due to the higher sales and improved manufacturing efficiency, despite higher raw material prices.

Slight improvement in qoq performance

On qoq basis, earnings improved slightly by 0.5% mainly due to lower operating cost from manufacturing efficiency, automation and effective cost control. As a result EBIT margin expanded slightly by 0.5ppt.

Additional capacity in FY18

Plant 16 is now operational and expected to contribute to the group’s earnings growth in FY18 with additional capacity of 3bn pcs p.a (+14%). Additionally, due to the higher demand for Low Derma nitrile glove (patented nitrile accelerator-free gloves), 2 more new plants (P17 & P18) with total capacity of 4.5bn are under construction and expected to be completed in 1HFY18 and 2HFY18 respectively.

Downgrade to HOLD with unchanged TP of RM9.10

We maintain our forecast for FY18 and FY19 as we remain positive for FY18 onward on the back of robust global demand, new additional capacity as well as stable raw material prices. Maintain our TP at RM9.10 based on unchanged PER of 25x (3-years historical average) applied to its FY18 EPS. While we are confident in Kossan’s good earnings prospect, we believe this has been largely priced in at this juncture. Hence we downgrade Kossan to HOLD.

Source: BIMB Securities Research - 23 Feb 2018