• Overview. 3QFY19 net profit declined by 12% qoq and 9.2% yoy to RM49.2m. This was majorly due to lower volume (c.-3% qoq, -1% yoy), and ASPs (c.-1% qoq, -6% yoy) as well as higher natural gas cost (+5.4% qoq, +5.8% yoy). Additionally, temporary shortage of labour in 3Q19 also lent weight to the weak results performance.
   
• Key highlights. Kossan’s 3QFY19 net profit margin dropped to 9.3% (- 0.9ppts qoq, -0.1ppts yoy) due to increase in operating expenses especially natural gas cost which can only be passed-on in the next quarter. We expect higher ASPs in 4Q19.
   
• Against estimates: Below. 9MFY19 net profit grew 15.9% yoy mainly due to increase production efficiency and effective cost control. However, results were slightly below our and consensus full year estimates at 69%/68%. Deviation against our forecast was due to lower sales volume than expected.
   
• Change in forecast. We have cut our FY19-20E EPS forecast by 5.5%-5% as we tweaked lower our sales volume estimate.
   
• Outlook. Global demand for glove is still growing and Kossan is expected to benefit as production volume continues to grow in the coming quarters with Plant 18 & Plant 19 (refer table 3) anticipated to start contributing. Overall, profit margin is likely to improve underpinned by ongoing cost efficiency efforts and automation.
   
• Our call. Maintain BUY call with TP RM4.60, based on PER of 23x (5-years historical forward mean) and rolled over to FY20 EPS. We like Kossan due to its strong earnings growth of c.12% in CY19 (vs average sector peers c.2%) despite challenging environment on anticipated slowdown in global economy and higher competition.

Source: BIMB Securities Research - 22 Nov 2019