Results

• Below expectation. 9MFY16 PATAMI fell by 15% YoY to RM126m, accounting for 59% of HLIB and consensus full year estimates.

Deviations

• Mainly due to lower margin and loss of production output caused by scheduled revamps work on older lines.

Dividends

• Declared interim dividend of 5 sen/share.

Highlights

• YoY , revenue fell by 6.3% on the back of lower sales volume (-3.8%) as a result of scheduled revamps work on 2 of its production plants. We understand utilisation rate has fallen below its 80% optimum level. PATAMI fell further by 38% mainly due to intensify in price competition and escalated production cost.

• QoQ , revenue improved by 2.5% attributed by 3% higher in sales volume. However, PATAMI fell by 17% due to increasing price competition and rising production cost (hike in minimum wages and natural gas). We understand the revamps works have been completed and production should start to normalise in 4Q16.

• In view of continuous pricing competition, management will emphasize on its patented accelerator free nitrile glove and other unique type of gloves which command better margin. It had launched its patented accelerator free nitrile gloves in Sept16. This should help to protect margin amidst intense pricing competition.

• With the new plants in Jalan Meru and Bestari, capacity is expected to increase by 14% and 18% in CY17 and CY18 respectively. Both plants will be equipped with high degree of automation and higher output per line. However, the expansion will be progressive to cater for new products.

Risks

• Surge in nitrile and latex prices, spike in chemical prices, and depreciation of USD vs. MYR.

Forecasts

• Our FY16, FY17 and FY18 earnings are reduced by 16%, 2% and 2% respectively after we factor in lower utilisation rate due to loss of production from revamp works and lower margin assumptions.

Rating

HOLD ↔

• We like Kossan for its management’s extensive engineering experience and continuous investment in R&D/automation. However, we opine that earnings prospects have been priced in its valuation.

Valuation

• Maintain HOLD with TP lowered from RM6.07 to RM5.93 based on an unchanged P/E multiple of 15.9x CY17 EPS post earnings downgrade.

Source: Hong Leong Investment Bank Research - 23 Nov 2016