Results

• 1QFY15 revenue of RM369.3m (+20.6% yoy, +2.3% qoq) was translated into adjusted PATAMI of RM45.3m (+23.0% yoy, +8.4% qoq), accounting for 23.3% of HLIB and consensus full year estimates.

Deviations

• In-line.

Dividends

• None.

Highlights

• 1QFY15 revenue grow by +20.6% yoy boosted by cleanroom division and glove division but partially off-set by technical rubber division.

• Glove division: Revenue improved by +23.7% yoy mainly due to higher sales (+30%) as well as improved production mix of nitrile and natural rubber (66:34 vs. 57:43 corresponding quarter). This has helped Kossan to mitigate the impact of lower ASP as a result of low raw material cost.

• Utilization rate remains healthy at more than 85%.

• Contribution from Plant 2 and 3 are insignificant during the current quarter as it will only commission full capacity starting June onwards. We understand that both plants will add 4bn pcs of capacity and management shared that nitrile capacity has been taken up fully by customers.

• On expansion plant, management guided that they are planning to build another 2 new nitrile plants with capacity of producing 4.5bn pcs annually. Construction works is slated to begin within the next three months and expected to be completed in early 2017.

• TRP division: Top line for TRP has decrease by 5.0% yoy as a result of slow in overall economic conditions after plunge in oil price and completion of some projects supplying infrastructure products.

• Management remain optimistic on the recovery of TRP division going forward banking on contribution from more new projects coming on stream in the coming quarters as well as prudent cost management.

• Clean-room division: Higher revenue (+37.3% yoy) attributable to higher sales volume across various products coupled with lower overhead cost.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD, TP: RM6.31

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

We upgrade from UNDER REVIEW to HOLD as we lift our P/E multiple from 12.8x to 17.5x of CY16 EPS, leading to a higher TP of RM6.31 (+37.0% from RM4.61 previously).

• Our valuation is pegged to P/E multiple of 17.5x of CY16 EPS, based on 2SD above 5-year historical average P/E (see Figure #5).

Source: Hong Leong Investment Bank Research - 22 May 2015