Results

• Below expectation. 1H17 PATAMI of RM92.0m (-0.2% yoy) accounted for 37.3% of HLIB and 43.1% consensus of full year estimates.

Deviation

• Deviation stems from a longer-than-expected time lag in passing on the price increases to customers namely from the TRP segment and Kossan’s conservative approach to selling newly installed capacity in FY17.

Dividends

• None.

Highlights

• YTD: Revenue grew to RM990.5m (+21.7% yoy) due to higher volumes (c.+6.7%) and higher ASP (+11.2%). PATAMI declined marginally by 0.2% to RM92.0m due to lower contributions from the TRP segment.
• YoY: Revenue grew to RM491m (+21.5% yoy) on the back of higher volumes (c.+5.7%), ASP (+12.8) and a favourable USD. Subsequently, PATAMI grew to RM45.5m (+11.1% yoy).
• QoQ: Revenue was flattish qoq despite a higher ASP (c.+5.8%). PATAMI declined by 2.2% due to the lower contributions from the TRP segment and softness in demand from the cleanroom segment as customers adjusted their demand on the back of ASP revision. We expect contributions from the cleanroom segment to normalize in the coming quarters.
• Capacity utilisation remained within the group’s optimal threshold of 80%. Whilst the ASP recovery is expected to improve profitability gradually throughout FY17.
• We understand that the deviation from the TRP segment stems from the time lag in between completion of projects and the commencement of incoming projects in the pipeline. We continue to expect Kossan to benefit from the incoming wave of infra projects in the country.
• Management guided trial runs are being undertaken at plant 16 and the sale of new capacity should begin in October. We continue to expect a stronger 2H17 riding on the incoming additional capacity of Kossan’s patented low derma nitrile gloves.

Risks

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

Forecasts

• We lower our FY17-19 forecasts by 16%-5% to better reflect Kossan’s conservative approach to selling off newly installed capacity. We now assume a capacity of 23bn in FY17 (previously 25bn) on better management guidance.

Rating

#bull# We downgrade our call to a HOLD given the share price

• rally and lower capacity installation assumption.
• We like Kossan for its management’s extensive engineering experience and continuous investment in R&D/automation.

Valuation

• Post earnings revision, our TP is lowered to RM7.10 (from RM7.13) based on P/E multiple of 16.9x FY18 EPS, in line with its 5 year historical average (# Figure 4).

Source: Hong Leong Investment Bank Research - 25 Aug 2017