Results

1QFY14 revenue of RM306.2m (-6.4% yoy, -5.8% qoq) was translated into a core net profit of RM32.3m (+5.6% yoy, -14.4% qoq), which came in below expectations, accounting for 17.7% and 18.2% of HLIB and consensus full year estimates, respectively.

Deviations

Lower-than-expected sales due to production downtime in gloves division for line conversion and upgrade purposes.

Dividends

None (1Q13: None).

Highlights

Gloves division registered negative revenue growth (-9.0% yoy, -5.0% qoq) which was chiefly due to lower production output and lower ASP. This was caused by a downtime in production (to convert 8 lines from producing powdered natural latex gloves into lines producing powder free nitrile gloves) as well as ongoing upgrading works.

Despite that, PBT growth from gloves division turned positive (+5.5% yoy, +5.0% qoq) thanks to improved efficiency, superior quality and optimum product mix.

Kossan is tackling the challenges of rising costs of wages and utilities through technology by installation of new “state of the art” fast production lines and automating/upgrading of existing production lines.

Expansion plan is on track towards achieving total installed capacity of 22bn pieces of gloves p.a. by 2015, with an additional of 17 “state of the art” production lines in:

1. Plant 1: 5 lines had been commissioned in Apr 2014.

2. Plant 2: 6 lines to be commissioned in Jul 2014.

3. Plant 3: 6 lines to be commissioned in Sept/Oct 2014.

The in-house R&D and engineering are acting as the panaceas in this competitive environment, through development of new gloves as well as continuous improvement in quality and efficiency.

Kossan remains positive in all the divisions, anticipating sales expansion in technical rubber division (particularly industrial and automotive parts) and continued growth in clean-room division through aggressive marketing, increasing market acceptance and superior quality.

Risks

• Further reduction in ASP amid steep competition.
• Surge in nitrile and latex prices.
• Depreciation of USD vs. MYR.

Forecasts

Unchanged pending company visit later this week.

Rating

UNDER REVEIEW, TP: RM4.81

Positives – Balanced 50:50 product mix of nitrile and NR gloves will allow it to cater to both markets and mitigate risks from sudden price hikes in either nitrile or NR latex.

Negatives – Exposure to possible supply glut as a result of over aggressive expansion by all glove players.

Valuation

Stock rating under review with unchanged TP of RM4.81 derived based on 12.8x CY15 EPS, pending more management guidance from forthcoming company visit.

Our target P/E multiple of 12.8x was derived by discounting 4x to the average of Hartalega and Top Glove’s P/E multiples. On average, Kossan has been trading at 4x discount to peers for past 5 years.

Source: Hong Leong Investment Bank Research - 26 May 2014