• Kossan’s 1H18 earnings of RM88m were in-line with our full year forecasts at 39% as we are expecting higher 2H18 earnings supported by fully commissioned Plant 16 in August.

• Kossan’s 2Q18 earnings dropped 4.5% yoy and 2.4% qoq due to the time-lag in cost pass through arising from higher raw material cost, natural gas, as well as less favorable currency rate.

• We remain upbeat on Kossan’s long term outlook. Additional capacity from plant 16 (+14%) with high speed dipping technology and automation will contribute to higher FY18 earnings growth.

• Maintain BUY with TP RM5.50 based on PE 26x applied to FY19 EPS.

Results in-line, expect higher 2H18 earnings growth

Kossan’s 1H18 earnings decreased by 4% to RM88m mainly due to cost pass through time-lag as production cost rose due to increase in natural gas prices (+21.9%), as well as less favourable USD/MYR exchange rate (- 10.3%). Overall, results were in-line with our full year forecast at 39% as we are expecting higher 2H18 earnings growth from higher output of plant 16’s full commissioning in Aug 2018.

Volume sold for 2Q18 remains robust

Kossan’s 2Q18 revenue increased by 1.3% yoy and 2.6% qoq to RM496.8m due to strong demand for its gloves division with higher volume sold (+8.9% yoy and +2.8% qoq) and increase in ASP. However, earnings dropped by 4.5% yoy and 2.4% qoq to RM43.4m. This is mainly due to time-lag in cost pass through arising from increase in nitrile raw material costs (+13.2 yoy; +10.1 qoq) and natural gas, as well as less favourable USD/MYR exchange rate (-8.82 yoy).

Outlook remains positive

We remain positive on Kossan outlook supported by higher global demand and their supply ability dynamics. We believe 2H18 could see the beginning of Kossan stepping up its annual earnings with full commissioning of Plant 16 (+3bn pcs) in Aug 2018 and Plants 17-19 (+9bn pcs) targeted to go online in 4Q18, 2Q19 and 4Q19 respectively. In our opinion, the new plants with high dipping technology and high degree of automation are expected to improve Kossan’s margin moving forward. Over the long term, Kossan plans to build an integrated glove manufacturing facility at its acquired Bidor Land (+34bn pcs proposal).

Maintain BUY with unchanged TP of RM5.50

We maintain our forecast as we are expecting stronger 2H18 earnings growth supported by greater capacity coming on stream from 2H18 onwards, as highlighted in our recent report dated 8/8/2018. We estimate that the weaker ringgit against USD, i.e. RM4.10 in 2H18 currently versus average of RM3.95 in 1H18, will also boost 2H18 performance. Maintain BUY with TP at RM5.50 based on unchanged PER of 26x applied to its FY19 EPS.

Source: BIMB Securities Research - 20 Aug 2018