• Kossan’s 9MFY18 earnings of RM141m (+2.6%) came from higher growth in Technical Rubber division (TRPs). However, it was below ours and consensus FY18 forecast at 62% and 67% respectively

• Kossan’s 3QFY18 earnings increased to RM54.1m (18.5% yoy and 24.6% qoq) mainly due to higher sales and effective cost control

• We remain positive on higher 4QFY18 earnings due to full commissioning of plant 16, better margin from current low nitrile raw material prices and weak ringgit

• We revised down our FY18F-20F forecast by c.13%. Maintain BUY with new TP RM5.00 based on PE 27x applied to FY19 EPS.

Kossan 9MFY18 improved slightly from higher TRPs division

Kossan’s 9MFY18 earnings increased by 2.6% yoy to RM141.3m mainly contributed by higher TRPs division (+69.7% yoy in PBT) due to increase in sales deliveries and higher margin products. This growth mitigated the slight loss in gloves division (-0.17% yoy) owing to increase in its glove operating cost. However, earnings results were below ours and consensus full year forecast at 62% and 67% respectively.

Volume sold for 3Q18 remains robust

Kossan’s 3Q18 revenue increased to RM573.9m (+71.3% yoy and 17.3% qoq). This was due to strong demand in its gloves division with higher volume sold (+11.9% yoy and +7.7% qoq) arising especially from new Plant 16 capacity and increase in ASP (11.5% yoy and 1.8% qoq). Earnings increased to RM54.1m (18.5% yoy and 24.6% qoq) mainly due to higher sales, production efficiency and effective cost control. Consequently, margin improved slightly to 9.4% (+0.1ppts yoy and +0.7ppts qoq).

Outlook remains positive

We remain positive on Kossan’s outlook supported by higher global demand and their supply ability dynamics. Expansion plans for Plant 17-19 remain on-track, which will boost capacity to 32bn pcs by end-2019 (table 2) to support their growth in future earnings. We believe 4QFY18 could see stronger earnings qoq on the back of full quarter contribution from Plant 16, which owns high-speed dipping technology and high automation. Together with weaker ringgit against USD, as well as softer nitrile raw material prices since Oct 2018, we expect margin to improve.

Maintain BUY with new TP of RM5.00

The 3Q results prompted us to revise down our earnings forecast by 13%/13%/9% for FY18/19/20 respectively due to lower sales volume and higher cost than previously projected. Hence, we have derived a new TP of RM5.00 (from RM5.50) based on PER 27x (forward sector average) pegged to FY19 EPS. Maintain BUY.

Source: BIMB Securities Research - 19 Nov 2018