Results

9M14  revenue of RM938.4m (- 4.5% yoy) was translat ed into a  core  net  profit  of  RM99.3m  (+0.5%  yoy),  accounting  for 65.5%  and  61.2%  of  HLIB  and  consensus  full  year estimates,  respectively.

We  deem  this  to  be  in  line  as  we  are  expecting  a  stronger quarter  ahead  from the contribution  of new capacity.

Deviations

• Largely in line.

Dividends

• Declared  1 st interim  (single -tier )  dividend  of  3.5  sen  per share (9M13: 3.5 sen) with ex-date on 8 th Dec.

Highlights

3Q14  revenue  climbed  slightly  by  8.1%  qoq  on  the  bac k  of stronger sales from gloves and clean- room divisions, despite slower  sales from technical rubber  products (TRP)  division.

Glove  division:  Improved  sales  (+2.6%  yoy,  +12.7%  qoq) thanks  to  the  contribution  of  additional  5  new  lines  from Plant 1, which are running  at full capacity.

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 3QCY14.

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  is  confident  that  their  efficient production  lines  and  favourable  product  mix  between  nitrile and latex gloves  will give  them the competitive  edge.

TRP  division: Slower sales ( -21.3%yoy, -18.7% qoq) due to the weak  industrial and automotive parts market dragged by slower  world  economy,  neutralising  the  strong  growth  of infrastructure  products market in the Asean region.

It  remains positive  about  this division as their  vigorous effort of  looking  into  international  markets  will  bear  fruit  in  the coming quarter(s).

Clean-room  division:  Higher  revenue  was  offset  by shrinking ma rgin (-3.9ppt yoy,  -1.4ppt qoq). The margin was compressed  by  the  higher  expansion  and  professional “trademark”  fees of the trading company.

The company foresees continuous growth in this segment  as the expansion programme has been completed with facilities to produce superior quality products. They are also  working closely with partners  for continued product  certification.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD, TP: RM4.49

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

Upgrade  from  SELL  to  HOLD  as  we  roll  forward  our valuation to CY16, leading to a higher  TP of  RM4.49  (+21% from RM3.70  previously).

Our  valuation  is  pegged  to  an  unchanged  P/E  multiple  of 12.8x  of  CY16  EPS,  based  on  1SD  above  5-year  historical average  P/E

Source: Hong Leong Investment Bank Research - 21 Nov 2014