• Overview. 4QFY19 net profit increased to RM61m (+24% qoq, +4.3% yoy) mainly due to rise in sales volume (7.6% qoq, +3.8% yoy). Lower NBR raw material prices (-5% qoq, -13% yoy) mitigated the increase in other operating costs. Net profit for FY19 jumped to RM224.8m (+12.5%) on overall higher volume sold (+7.8%), better manufacturing efficiency and cost control. Consequently, margin improved slightly to 10.1% (+0.8 ppts).

• Key highlights. Kossan managed to record a commendable FY19 result despite higher competition and operating costs faced. Restocking activities were observed during the quarter with current plant utilization rate at c.85%. We estimate utilisation rate to remain above 85% in FY20 due to higher demand driven by the Covid-19 outbreak. Upon completion of Plant 18 & 19 in FY20 (table 3), Kossan’s installed capacity is targeted to increase to 32bn pcs p.a (c.+21%).

• Against estimates: Inline. FY19 net profit was inline with our and consensus forecast at 100% and 99% respectively.

• Outlook. Going forward, with more infected cases reported around the globe (outside China) latest being in Italy, Lebanon, Iran and South Korea, there is heightened international fear on the Covid-19 outbreak. This would create greater global healthcare awareness which could lead to higher and sustained growth in gloves requirement. We have raised our earnings forecast higher for FY20/FY21 by 6%/3% to factor in the surge in demand due to Covid-19 epidemic as well as better margin c.11%.

• Our call. Maintain BUY with new TP of RM5.70 (from RM4.60) based on higher PER of 27x (1SD above 5-yrs historical forward mean) from 23x pegged on FY20 EPS (chart 1). We like Kossan due to its strong earnings growth of c.20% in CY20 and undemanding valuation, trading at circa 20% discount to sector peers. Additionally, we remain optimistic that the stock could trade above +1SD in anticipation of build-up in demand and higher earnings growth in subsequent quarters.

• Upside risk. Stronger than expected growth in demand and sudden weakness in MYR.

Source: BIMB Securities Research - 24 Feb 2020