• Overview. 2QFY19 net profit increased to RM55.9m (+28.6% yoy) on the back of higher demand for its Gloves and higher margin Technical Rubber products (TRPs). On qoq basis, net profit declined by 4.8% mainly due to revamp and upgrading works across the group’s plants (for efficiency and energy savings) during this quarter, which lowered its production output by c.5-7% qoq.
• Key highlights. Kossan’s 1HFY19 registered higher sales volume (+14.9% yoy) from higher demand and increased production output. Net profit margin improved to 10.3% (+1.3ppts yoy). We believe this was due to increased manufacturing efficiency as well as lower nitrile butadiene raw material prices c.-9% qoq & -27% yoy (source: Bloomberg).
• Against estimates: Inline. 1HFY19 net profit grew 30.3% yoy and was inline with ours and consensus full year estimates at 49%/48%.
• Outlook. Kossan’s earnings are expected to be lifted by increasing global demand, capacity expansion c.+20% by end 2019 (refer table 3) and current weak ringgit. Despite anticipating higher competition especially for nitrile gloves, which could put pressure on ASPs, we expect profit margin to remain stable at c.9.5-10% level underpinned by ongoing cost efficiency efforts and automation. The new plants are more efficient and the upcoming robotic packaging system will see manpower there reduced by two-thirds.
• Our call. Our earnings forecast remains unchanged at this juncture. Maintain BUY with TP of RM4.60 based on unchanged 25x PER pegged on FY19 EPS.

Source: BIMB Securities Research - 22 Aug 2019