Results

• 6MFY15 revenue of RM755.0m (+23.8% yoy) was translated into adjusted PATAMI of RM92.7m (+43.6% yoy), accounting for 47.8% and 45.5% of HLIB and consensus full year estimates, respectively.

Deviations

• In-line.

Dividends

• None (1H14: None).

Highlights

• 2Q15’s sustained sequential performance elevated 1H15’s revenue by 23.8% yoy, with major contribution coming from glove division (+27.3% yoy) – thanks to higher sales volume (+37% yoy) and greater operational efficiency which has partially offset decline in ASP.

• Sales mixed have been trending towards nitrile with the ratio of latex to nitrile of 32:68 in 1H15 vs. 41:59 in 1H14.

• In addition, top-line was buoyed by stellar improvement from clean room division (+60.5% yoy), albeit its contribution only stood at 4% to total revenue.

• As expected, technical rubber division continues to show poor performance (-7.2% yoy) as a result of murky economic outlook, coupled with higher production cost. Nonetheless, management guided that they are expecting more orders from customers in 2H15.

• Average utilization rate remains healthy at more than 85%.

• Capacity expansion is on track with Plant 2 and 3 already fully-commissioned in June and expected to contribute significantly from July onwards.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD , TP: RM7.88 

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 maintain our HOLD recommendation but we li ft our P/E multiple from 17.5x to 21.9x of CY16 EPS, leading to a higher TP of RM7.88 (previously RM6.31).
• A higher P/E multiple is justified as we pegged our valuation to +2SD above Kossan’s 3-year historical P/E versus +2SD above 5-year historical P/E previously (see Figure #6). This is mainly to reflect changes in operating envi ronment for rubber products in recent years.

Source: Hong Leong Investment Bank Research - 21 Aug 2015