Results

• FY14 revenue of RM1.3bn (-0.6% yoy) was translated into a core net profit of RM129.6m (-6.9% yoy), accounting for only 86% and 85% of HLIB and consensus full year estimates, respectively.

Deviations

• Lower-than-expected revenue from glove division due to lower ASP and flattish volume.

Dividends

• None (4Q13: None).

Highlights

• FY14 revenue dropped slightly by -0.6% yoy on the back of slower sales from gloves, despite higher sales from cleanroom divisions and technical rubber products (TRP) division.

• Glove division: Revenue declined (-1.9% yoy) despite contribution of additional 5 new lines from Plant 1 mainly due to: (1) Lower ASP; (2) Loss of production (approximately RM18.0m) due to state-wide water rationing in April; and (3) scheduled revamp of some aged production lines.

• Utilization rate remain above 85% and production mix for nitrile and latex stands at 57:43 respectively.

• Moving forward, production capacity in 2015 will be added by 6bn pcs from 16bn pcs after completion of 2013 expansion plan. Products mix for nitrile and natural rubber will be shifted to 70:30.

• TRP division: Sales improved 1.1% yoy, boosted by higher exports in infrastructure products, automotive parts and marine fenders. Declining ASP is offset by improved cost efficiency which enabled Kossan to win more orders from overseas customers, particularly in Asian Region.

• It remains positive about this division as their vigorous effort of looking into international markets will bear fruit especially in automotive parts.

• Clean-room division: Higher revenue (+37.5% yoy) in line with concerted effort by management in marketing and improving the products quality.

• The company foresees continuous growth in this segment as aggressive expansion is being undertaken especially into Asia and China, the major user of cleanroom products.

Risks

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

Forecasts

• Pending update from management.

Rating

• UNDER REVIEW, TP: RM4.61

Positives

• Management team with extensive engineeringexperience, continuous investment in R&D/automation.

Negatives

• Exposure to possible supply glut as a result ofover aggressive expansion by all glove players.

Valuation

• Stock rating under review with a higher TP of RM4.61 (from RM4.49 previously as we fine-tuned our actual FY14 figures), pending more management guidance.
• 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 (see Figure #6).

Source: Hong Leong Investment Bank Research - 26 Feb 2015