• Kossan’s 1QFY18 earnings dropped 4.3% yoy and 3% qoq due to the time-lag in cost pass through arising from higher natural gas

• 1QFY18 earnings were at 19% of our full year forecasts but we consider this being inline as Plant 16 is expected to be fully operational in 2H.

• Upgrade Kossan to BUY with unchanged TP of RM9.10 based on 25x PER. We see its fundamentals remain strong with the additional capacity coming on stream in FY18 (+10%) and FY19 (+18%). Additionally we believe current low price level have priced in the capacity delay.

Lower 1QFY18 performance due to cost pass through time-lag

Kossan’s 1QFY18 earnings dropped by 4.3% yoy and 3% qoq to RM44.5m. The weak performance was mainly due to time-lag in cost pass through arising from an increase in natural gas (starting early Jan) which took about 2 months to be pass on to customers. As a result, EBITDA margin dropped 1.3ppts qoq. Demand for gloves remained strong with higher volume sold at +2.7% yoy and +3.4% qoq. All of Kossan’s production lines are running at full capacity except Plant 16 which is facing teething issues and did not contributed to 1Q18 profit.

No more delay on capacity expansion moving forward

Management guided that Plant 16 production issues have been resolved with all lines expected to be running by July 2018. We are expecting higher 2H18 earnings growth coming from Plant 16 as this plant utilises high-speed dipping technology and a high degree of automation. Additionally, 2 new plants (P17 & P18) with total capacity of 4.5bn are on track and expected to be completed by 3QFY18 and 1QFY19 respectively. In total, capacity is expected to grow by 10% and 19% in FY18 and FY19 respectively.

Launching Halal-certified gloves

Kossan is the first glove maker globally to obtain and produce halal certified gloves (under brand CONFIDENZ) with current production volume of 2.4bn and is targeting to raise its total capacity of halal certified gloves to 3.6bn pcs p.a. by year end. As gloves are widely used in an expanding food industry, there is much growth potential and opportunity for Halal compliance glove going forward.

Upgrade to BUY with unchanged TP of RM9.10

We maintain our forecast for FY18 and FY19 as we remain positive going forward 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. We upgrade our call to BUY after recent decline in share price and we believe current price level has priced in the capacity delay.

Source: BIMB Securities Research - 25 May 2018