Results

1H14 revenue of RM610m (-6.0% yoy) was translated into a core net profit of RM64.6m (+6.3% yoy), which came in below expectations, accounting for 40.2% and 37.6% of HLIB and consensus full year estimates, respectively.

Deviations

Lower-than-expected sales revenue impeded by lower output in gloves division due to production downtime associated with water rationing crisis.

Dividends

None (1H13: None).

Highlights

2Q14 revenue contracted (-5.5% yoy, -0.8% qoq) chiefly due to a lower production output in the glove division. This was caused by production downtime at a plant in Klang, which was affected by the state-wide water rationing crisis in April. ASP was also lower.

The revenue contraction in the glove division (-10.5% yoy, -3.4% qoq) was partly offset by strong growth in technical rubber division (+15.6% yoy, +16.0% qoq). The improvement was attributed to higher export sales of automotive parts as well as marine and dock fenders.

Cleanroom division continues to perform well in accordance with management’s expectation.

Expansion in glove division is on schedule towards achieving total installed capacity of 22bn pieces of gloves p.a. by 2015 with:

1. Plant 1: 5 lines commissioned full production in Aug 2014.

2. Plant 2: 6 lines scheduled for full production in Nov 2014.

3. Plant 3: 6 lines scheduled for full production in Jan 2015.

Going forward, Kossan remains positive in all the divisions.

Glove division: Optimistic to deliver a stronger set of results in 2H14, backed by the expected completion of 3 plants.

Technical rubber division: Positive with increased competitiveness in international markets thanks to favourable cost of natural rubber and automation process.

Clean-room division: Tapping on the growth potential in Asia and China (the major user of clean-room products).

Risks

• Surge in nitrile and latex prices.
• Spike in chemical prices.
• Depreciation of USD vs. MYR.

Forecasts

Due to the lower-than-expected sales caused by lower production output and latest capacity expansion plan, we tweaked our production forecasts. As a result, FY14, FY15 and FY16’s EPS were trimmed by 5.9%, 6.2% and 5.3%, respectively.

Rating

HOLD, TP: RM3.70

Positives – Management team with extensive engineering experience, continuous investment in R&D/automation.

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

Valuation

Maintain HOLD as we revised our TP downward by 5.2% from RM3.91 to RM3.70, based on unchanged P/E of 12.8x CY15 EPS.

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 - 21 Aug 2014