• Kossan’s 1QFY19 earnings of RM58.7m (+31.9%) came from higher growth in all their three divisions especially gloves division. Overall, it was in-line with our and consensus forecast at 25%

• On quarterly basis, earnings dropped slightly by 1.3% mainly due to higher effective tax rate

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

• Reiterate BUY call with new TP of RM4.60 (from RM5.00) based on revised PE of 25x pegged to FY19 EPS

Strong yoy performance from all three divisions

Kossan’s 1QFY19 earnings increased by 31.9% yoy to RM58.7m, attributed to improvements in all three divisions. Frontrunner, Gloves division (c.88% of total sales) PBT rose by 43.2% yoy on higher sales volume sold (+19%) mainly from additional capacity (Plant 16&17) despite a drop in ASP c.3-5% yoy. The Technical Rubber division (TRPs) saw a 35% rise in PBT yoy driven by higher sales deliveries, favourable raw materials prices and higher margin products. Overall, earnings were in-line with our and consensus FY19 forecast at 25%.

Lower earnings qoq impacted by higher effective tax rate

Kossan’s revenue dropped 4.7% qoq on the back of lower ASP c.5-7%, as a result of higher competition. However, PBT increased by 5% qoq as the company benefited from lower raw material prices (NBR: c.5-7% qoq), production efficiency especially from new plant as well as overall effective cost control, in our view. Overall, PBT margin improved by 1.3 ppts qoq to 13.4%. At net profit level, Kossan registered slightly lower earnings of RM58.7m (-1.3% qoq) due to higher effective tax rate of 20.8% (+6.3 ppts).

Outlook remains positive

Kossan’s FY19 earnings growth is to be supported from new Plant 17 with 1.5bn pcs. p.a (+6%). Additionally, expansion plans for Plant 18-19 is on track and will boost capacity to 32bn pcs by end-2019 (table 3). Though 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 with currently c.75% nitrile in its product mix. Looking at this positively, we believe the new plants are more efficient, with installed automated stripping and stacking process, as well as automated packaging process expected by end-2019. The higher efficiency will help protect profit margin moving forward, based on our estimates.

Maintain BUY with new TP of RM4.60

We have derived a new TP of RM4.60 (from RM5.00) based on lower PE of 25x (in-line with +0.5SD above 5-years historical forward mean) versus 27x previously. The revised PE is to compensate for short-term higher nitrile competition risk and recent compression in sector multiple. Given an upside of 21% based on our new TP, we reiterate our BUY call on Kossan.

Source: BIMB Securities Research - 27 May 2019