Results

• Within expectation. FY17 PATAMI of RM183.4m (yoy: +10.0%) accounted for 99.8% of HLIB and 95.0% consensus of full year estimates.

Highlights

• YTD: Revenue grew to RM1.96bn (+17.4% yoy) due to higher volumes (c. +6.0%) and ASP (+7.0%). Consequently core PATAMI grew by 11.2% to RM185.8m due to the above mentioned factors. EBITDA margins declined by 1.4ppts to 16.1% (FY16: 17.5%) attributed to higher raw material prices (NR +30.0%, NBR +14.1%) and other key cost drivers in the manufacturing process.

• YoY: Revenue grew to RM477.8m (9.0% yoy) on the back of higher volumes (c. +5.0%) and ASP (+3.0).Consequently PATAMI grew to RM45.7m (+3.6% yoy).

• QoQ: Revenue was flattish qoq (-2.3%) attributed to stable volumes but partially offset by what we believe to be competitive ASP. Despite this, core PATAMI grew to RM48.3m (+5.7%) due to improvement in manufacturing efficiency and automation along with effective cost controls and better contributions from the TRP division (c. +11.2% qoq).

• We believe that capacity utilisation increased in tandem with the rest of the industry, above the threshold of 80% on the back of the China pollution purge in FY17.

• We understand that all 8 lines in plant 16 were completed as of December 2017. We expect plant 16 (3bn pieces or +14%) to contribute to FY18 earnings progressively. On the other hand, plant 17 and 18 with an additional 4.5bn pieces capacity will boost the group’s earnings in FY19 (c. +18% yoy).

• Subdivision. In another filing, the group is proposing a share subdivision of 1 share into 2 to be determined at a later date. We are neutral on this announcement although we expect the proposal to boost the stocks liquidity. Our adjusted ex-TP is RM4.45 upon completion of the said exercise expected in the 3Q18.

Risks

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

Forecasts

• Unchanged. We introduce FY20 numbers.

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. Moving forward to FY18, the addition of c.14% or 3bn pieces of capacity is expected to drive the group’s earnings. Maintain HOLD .

Valuation

• Maintain TP of RM8.90 based on pegged to P/E multiple of 20.3x FY19 EPS, 0.5sd above its 5 year historical average (# Figure 5).

Source: Hong Leong Investment Bank Research - 23 Feb 2018