Kossan’s FY18 core PATAMI of RM184.1m (+14.0% YoY) came within our expectation at 95.7% but slightly below consensus at 92.0% of full year estimates. The glove segment saw higher volumes sold (+9.7%) whilst PBT margins deteriorated by 0.5ppts (FY17:12.2%) due to higher natural gas (+22.8%), nitrile (+9.3%) and a less favourable USDMYR environment (-6.6%) YoY. Plant 17 (1.5bn pieces) was fully commissioned in November. Upgrade to HOLD as share price has gravitated lower towards our TP. Forecast and TP of RM3.72 (20.3x FY19 earnings) unchanged.

Within expectations. FY18 core PATAMI of RM184.1m (+14.0% YoY) came within our expectation at 95.7% but slightly below consensus at 92.0% of full year estimates.

QoQ. Group revenue grew +2.7% to RM589.4m (3Q18: RM573.9m) on higher sales volume (+2.5%) from the gloves segment in addition to the TRP division growth (+ 9.2%) on the back higher sales deliveries. ASP declined (-1.9%) in light of the lower Nitrile (-9.1%) and Natural rubber (-5.9%) QoQ, resulting PBT easing 0.9% from the glove division. Core PATAMI declined marginally by 3.1% to RM54.5m due to forex.

YoY. Group revenue grew +23.4% (4Q17: RM477.8m) attributable to stronger performance from all 3 divisions. Volume growth (+17.3% YoY) and higher ASP’s (+7.5%) saw revenue and PBT increasing +25.4% and +16.7% for the glove division. PBT margins eased 0.5% to 11.6% (4Q17:12.2%) attributable to higher NBR prices (+11.8%) and natural gas (+23.7%) YoY. The TRP segments strong performance (revenue: +19.4%; PBT: +91.5%) is due to higher sales deliveries and higher margin products. EBITDA margin eased by 0.3ppts to 16.5ppts (4Q17 16.8%) partly due to costs associated with the commissioning of plant 17 and the above mentioned raw material associated factors. Core PATAMI improved by 22.6% YoY to RM54.5m as a result.

YTD. Revenue improved by +9.5% to RM2144.2m (from RM1957.4m) whilst EBITDA performance mirrored the topline, growing +9.6% to RM340.0m (from RM310.3m). For the glove segment, despite the higher volumes (+9.7%) and ASP (+6.1%), PBT margins deteriorated by 0.5ppts to 11.5% (FY17:12.2%) due to higher natural gas (+22.8%), nitrile (+9.3%) and a less favourable USDMYR environment (-6.6%) YoY partially offset by lower natural rubber prices (-27.6%). The group’s overall performance was buffered by a stronger showing from the TRP segment YoY (revenue: +14.0%; PBT: +75.6%; PBT margin: 14.9% vs. 10% in FY17). Core PATAMI improved by 14.0% despite higher finance costs (+71% YoY) associated with plant 16 &17 opening.

Outlook. Plant 17 (+1.5bn pieces capacity) was fully commissioned in November and is fully sold, (Plant 16 fully commissioned in August, +3bn pieces); as such it was able to contribute c.2 months in 4Q18. We continue to expect utilization rate to remain stable at c.85% in FY19, whilst earnings growth would be driven by the full impact of Plant 16 and 17 contributions and plant 18 in 2H19. Nonetheless, we remain cautious as more nitrile gloves capacity come on stream, putting downward pressure on ASP in FY19 and beyond. As at FY18 Kossan has a NBR: NR split of 75:25.

Forecast. We are leaving our forecast unchanged as the results were inline.

Upgrade to HOLD, TP: RM3.72. Maintain TP of RM3.72 but we upgrade to a HOLD given the recent share price weakness. Our TP is a function of FY19 EPS pegged to a PE multiple of 20.3x (0.5SD above the stock’s 5-year historical mean). We remain cautious on ASP pressure in FY19 on the back of the nitrile capacity coming on stream.

Source: Hong Leong Investment Bank Research - 25 Feb 2019