• Kossan’s FY18 earnings of RM200.8m (+10.3%) came from higher growth in Glove and Technical Rubber division (TRPs). Overall, it was in line with our and consensus forecast at 99% and 98% respectively

• On quarterly basis, 4QFY18 earnings rose to RM59.5m (+29.6% yoy and +9.9% qoq) mainly due to higher sales, effective cost control and lower effective tax rate

• We expect Kossan is on track to deliver earnings growth supported by its capacity expansion plan and ongoing cost efficiency efforts

• Maintain BUY with TP RM5.00 based on PE 27x applied to FY19 EPS

Strong FY18 earnings from higher Glove and TRPs division growth

Kossan’s FY18 earnings increased by 10.3% yoy to RM200.8m mainly contributed from Gloves and TRPs divisions. The Gloves division (c.87% of total sales) increased its PBT by 4.8% yoy due to higher sales volume (+9.7%), mainly from additional capacity from Plant 16, as well as higher ASP (+6.1%). The TRPs division saw a 75.6% rise in PBT yoy driven by higher sales deliveries and higher margin products. Overall, earnings were in-line with our and consensus FY18 forecast at 99% and 98% respectively.

Volume sold for 4Q18 remains robust

Kossan’s 4Q18 revenue increased to RM589.4m (+23.4% yoy and 2.7% qoq). This was contributed by strong demand in its gloves division with higher volume sold (+17.3% yoy and +2.5% qoq) arising especially from new Plant 16 capacity. Additionally, ASP increased 7.5% yoy, although on qoq basis ASP fell slightly by 1.9% due to cost passthrough in tandem with the decrease in nitrile prices (c.-9.5% qoq) and natural rubber prices (c.-5.9% qoq). As a result, earnings increased to RM59.5m (29.6% yoy and 9.9% qoq) as the company also benefited from production efficiency, effective cost control and lower effective tax rate of 14.5%. Net profit margin improved slightly to 10.1% (+0.5ppts yoy and +0.7ppts qoq).

Outlook remains positive

Plant 17 (fully commissioned in Nov 2018) and expansion plans for Plant 18- 19, will boost capacity to 32bn pcs by end-2019 (table 2) to support Kossan’s future earnings growth. Whilst global demand is increasing, we do not discount the risk of declining ASP in view of higher nitrile glove competition in the market. Kossan has continued to expand its nitrile gloves capacity and currently has 75% nitrile as its product mix. On the positive side, we believe the new plants are more efficient, with installed automated stripping and stacking process, as well as automated packaging process by end 2019. The higher efficiency will help protect profit margin moving forward.

Maintain BUY with TP of RM5.00

We reiterate our BUY call on Kossan, with an unchanged TP of RM5.00 based on PER 27x pegged to FY19 EPS. We believe Kossan is on the right track to deliver earnings growth supported by its capacity expansion plan, starting from Plant 16, and ongoing cost efficiency efforts.

Source: BIMB Securities Research - 19 Feb 2019