Kossan’s 1H19 core PATAMI of RM113.8m (+55.2% YoY) came within ours and consensus expectation. The glove segment saw lower volumes sold (5%-7% QoQ) due to revamp works at their factories. Maintain TP of RM4.35. We downgrade to HOLD given the share price performance since our upgrade in May by +9.4% has now narrowed the upside to our TP.

Within expectations. 2Q19 core PATAMI of RM55.7m (-4% QoQ, +57.9% YoY) brought the 1H19 sum to RM113.8m (+55.2% YoY). This was within ours and consensus expectation, making up 49.0% of full year estimates.

QoQ. Group revenue declined -1.9% to RM550.5m (1Q19: RM561.5m) attributed to scheduled revamp and upgrading works carried out across the groups plants which resulted in lowered production output of 5%-7% QoQ. We understand that blended ASP’s improved c.3%-5% across the groups gloves SKU’s. Note that prices of NBR declined (1%-2%), whilst NR prices increased (+15%-17%) during the quarter. Group PBT declined by 8.9% to RM61.9m (dragged by the gloves segment) whilst margins declined by 0.7ppts to 12.7%. Subsequently, core PATAMI declined 4.0% to RM55.7m.

YoY. Group revenue grew +10.8% (2Q18: RM496.8m) attributable to stronger performance from the glove division. Volume growth from the glove segment (+8.7% YoY) coupled with efficiency gains from their newer plants and NBR prices declining 10%-12% YoY (offset by increased NR prices +7%-9% YoY), saw revenue and PBT increasing +10.6% and +33.7% for the glove division. Group PBT margins gained 2.1% (2Q18: 10.9%) as a result. The TRP segments performance dipped (revenue: - 4.1%; PBT: -8.1%) due to unfavourable raw material prices (SMR10 +13.9% YoY). Group core PATAMI improved by 57.9% YoY to RM55.7m reflecting namely the contributions from the new capacity from the gloves division.

YTD. Group revenue grew +13.4% YoY (to RM1.11bn) on stronger performance from mainly the gloves segment (revenue”+14.5% YoY). Higher volumes sold (+14.9% YoY) and lower NBR prices (5%-7%) cushioned the lower ASP (4%-6%), resulting in PBT growth of +34.4% YoY. Effective tax rates were higher YoY (+3.4ppts) due to lower tax incentives utilized, despite this core PATAMI improved by 55.2% YoY.

Outlook. For FY19 earnings growth will be driven by the full impact of Plant 16 (3.0bn pieces) and 17 (1.5bn pieces) contributions and partial contribution from plant 18 (+2.5bn pieces) scheduled for commissioning in 3Q19 (4 lines in August, 2 lines each in September and October). Plant 19 (3.0bn pieces) will begin commissioning in 4Q19.

Forecast. Unchanged.

Downgrade to HOLD, TP: RM4.35. We downgrade Kossan to HOLD given the share price has performed, increasing by +9.4% since our upgrade in May. Maintain TP of RM4.35. Our TP is a function of FY19 EPS pegged to a PE multiple of 24x (the stocks 3-year historical mean).

Source: Hong Leong Investment Bank Research - 23 Aug 2019