Results

• Below expectation. 9M17 PATAMI of RM137.7m (+9.0% yoy) accounted for 66.7% of HLIB and 66.0% consensus of full year estimates.

Deviation

• Deviation: Delay in machine installation and water issues which affected the onset of 3bn pieces of capacity in FY17.

Dividends

• Declared interim dividend of 5 sen/share.

Highlights

• YTD: Revenue grew to RM1.48bn (+20.6% yoy) due to higher volumes (c. +7.0%) and higher ASP (+9.0%). Consequently PATAMI grew by 9.0% to RM137.7m due to the above mentioned factors. EBITDA margins declined by 1.83ppts to 15.8% (9M16: 17.6%) attributed to higher raw material prices (NR +48.1%, NBR +17.6%) and other key cost drivers in the manufacturing process.

• YoY: Revenue grew to RM489.2m (+18.1% yoy) on the back of higher volumes (c. +7.5%), ASP (+3.0) and lower base in 3Q16 which saw revamp works on 2 of its production lines. Consequently PATAMI grew to RM45.7m (+34.3% yoy).

• QoQ: Revenue was flattish qoq (-0.3%) attributed to a lower ASP (c.-7%) despite volume growth (c. +7.5%). Despite this, PATAMI was positively flattish (+0.4%) due to improvement in manufacturing efficiency and automation along with effective cost controls.

• We understand that capacity utilisation remains within the group’s optimal threshold of 80%.

• We had earlier anticipated that the sale of new capacity from plant 16 would have commenced in 2H17. However based on updated guidance, plant 16 will only fully contribute to the group’s earnings in FY18. To note, 2 of 8 lines are under production trial whilst the remaining 6 is expected to be completed by December. We expect plant 16 to fully contribute to FY18 earnings.

Risks

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

Forecasts

• We lower our FY17 forecasts by 11% to account for an overall higher cost structure. Our FY17 EBITDA margin assumption decreases to 16.1% from 17.5%.

Rating

• We like Kossan for its management’s extensive engineering experience and continuous investment in R&D/automation. However relative to its peers, Kossan has had issues with delivering on its capacity expansion in FY17 which has seen it forgo greater earnings growth in this glove sector upcycle. Maintain HOLD .

Valuation

Maintain TP of RM7.10 based on P/E multiple of 16.9x pegged to FY18 EPS, in line with its 5 year historical average (Figure #6).

Source: Hong Leong Investment Bank Research - 24 Nov 2017