Kossan’s 3QFY19 core PATMI of RM48.4m (-13.1% QoQ, -14.0% YoY) brought the 9MFY19 amount to RM162.2m (+25.2% YoY). The results came in below expectations due to lower ASP and higher natural gas costs. YTD showed improvement due to higher sales volume (+9%). We cut our FY19-21 earnings by -4%, -7% and -10% to account for lower ASP. Despite the earnings cut, our TP increases slightly to RM4.44 (from RM4.35) as we roll forward our valuation to mid-FY20 pegged to 23x PE (3-year mean). Maintain HOLD.

Below expectations. 3QFY19 core PATMI of RM48.4m (-13.1% QoQ, -14.0% YoY) brought the 9MFY19 amount to RM162.2m (+25.2% YoY), accounting for 70.0% of ours and 69.6% of consensus estimates. The results were below due to lower ASP (- 2.0%) and higher natural gas costs (+5.4%) as it was not passed through in 3QFY19.

QoQ. Revenue fell slightly to RM531.3m (-3.5% QoQ) due to lower sales volume (- 2%) and lower ASP (-2.0%). EBITDA declined to RM87.1m (-9.9% QoQ) whilst EBITDA margins decreased by 1.1ppts to 16.4% (from 17.5%), following that, core PATMI fell to RM48.4m (-13.1% QoQ). Gloves division performance was affected (PBT: -12.7%) by the increase in natural gas costs (+5.4%) which was not passed thru in the current quarter and temporary shortage of labour. Meanwhile TRPs division was boosted (PBT: +9.1%) thanks to increase in sales deliveries.

YoY. Revenue declined (-7.4% YoY) on the back of lower sales volume (-1%) and lower ASP (-7%). EBITDA margin improved slightly (0.1ppts) despite the higher natural gas prices (+10%). Consequently, core PATMI reduced by -14.0%. Gloves division eased (PBT: -14.3%) caused by lower ASP and increase in natural gas costs (+5.8%). On the other hand, TRPs division performed better (PBT: +1.1%) attributed to increased sales deliveries.

YTD. Revenue improved to RM1,643.3m (+5.7% YoY) due to higher sales volume (+9%) despite lower ASP (-5%). EBITDA increased to RM285.9m (+17.9% YoY) whilst EBITDA margins improved by 1.8ppts to 17.4% (from 15.6%), following that, core PATMI lifted to RM162.2m (+25.2% QoQ). The glove division showed improvement (PBT: +17.9%) attributed to higher sales volume (+7%) from increased production output as well as increased manufacturing efficiency and effective cost controls. TRPs division as well showed increment (PBT: +12%) mainly due to increase in sales deliveries.

Outlook. Plant 18 (2.5bn pieces) has been fully commissioned in November 2019, however it was affected in this quarter due to the affected temporary labour shortage; nevertheless the issue has been resolved. FY20 earnings will be driven by the increased capacity coming from Plant 19 (3.0bn pieces +10%) scheduled for commissioning in 1QFY20.

Forecast. We cut our FY19-21 forecasts by -4%, -7% and -10% respectively to account for lower ASP and higher depreciation on the new capacity (Plant 18 commissioned in November 2019).

Maintain HOLD, TP: RM4.44. Despite cutting earnings, our TP increases slightly to RM4.44 (from RM4.35) after rolling forward to mid-FY20 (from FY19) pegged to a PE multiple of 24x (3-year historical mean).

Source: Hong Leong Investment Bank Research - 22 Nov 2019