Results

• Within expectation. 4QFY16 PATAMI improved by 31% QoQ, bringing FY16 profit to RM171m (-16%), accounting for 95% of HLIB and consensus full year estimates.

Deviations

• None.

Dividends

• None.

Highlights

• YoY: Revenue was flat but PATAMI fell by 19% as EBITDA margin was reduced from 22% to 17% due to increasing price competition and rising production cost (hike in minimum wages and natural gas).

• QoQ: Revenue improved by 6% on the back of higher sales volume as utilisation rate had recovered above optimum level of 80%. PATAMI increased further by 31% due to completion of revamp works, resulting in higher production output and lower cost of production.

• ASPs for both NR and NBR increased by 2-3% QoQ. ASP has been bottomed out and should gradual increase on the back of rising raw material cost.

• Price of nitrile butadiene had surged by 35% to circa USD1.4/kg and average latex price had climbed up recently from RM6.5/kg to >RM8/kg. Despite this, we opine that the company should be able to pass through the rising cost to customers with 1-2 months lag impact.

• The new plant in Jalan Meru with 3bn pieces of capacity is expected to be completed in July 17 and will focus in production of low derma gloves. However, Phase 1 of Bestari Jaya will delay its commencement from end of 2016 to end of 2017 due to building plans and water supply constraints.

• Currently, we have conservatively factored in RM4.30/US$ in our FY17 and FY18 assumptions as compared to current rate of RM4.45/US$. We opine this will help to mitigate the impact of rising raw material prices.

Risks

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

Forecasts

• Unchanged.

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 unchanged TP of RM7.13 based on unchanged P/E multiple of 15.9x CY18 EPS

Source: Hong Leong Investment Bank Research - 24 Feb 2017