Kossan’s 4Q19 Core PATMI of RM61.0m (+39.3% QoQ, +23.6% YoY) Brought FY19 Core PATMI of RM229.7m (+24.7% YoY). The Results Came Within Expectations. FY19 Revenue Improved on the Back of Improved Sales Volume, Especially Stronger Contribution by the Gloves Division as Well as Increased Manufacturing Efficiency and Effective Cost Controls. We Maintain Our Forecasts as the Results Were in Line. We Maintain Our HOLD Call With Unchanged TP of RM5.00, Based on Mid-FY20 Earnings Pegged to PE Multiple 27x.

Within expectations. Kossan reported 4Q19 core PATMI of RM61.0m (+39.3% QoQ, +23.6% YoY) which brought FY19 core PATMI to RM229.7m (+24.7% YoY), accounting for 103% of ours and 104% of consensus estimates. FY19 core PATMI was arrived after adjusting for EI of -RM4.9m on unrealised foreign exchange loss.

Dividend. Dividend of 3.0 sen per share was paid on 20th January 2020. Final dividend is expected to be declared in June 2020. (FY18: 6.0 sen per share)

QoQ. Revenue of RM578.4m showed improvement of (+8.9% QoQ) essentially due to improvement in higher sales volume (+7.6%), slightly offset by lower ASP (-0.5%). EBITDA increased to RM97.9m (+12.5% QoQ) whilst EBITDA margin increased slightly by 0.5ppts to 16.9% (from 16.4%). Following that, core PATMI rose to RM67.4m (+39.3% QoQ). Gloves division better performance (PBT: +22.1%) was backed up by the increase in volume sold (+7.6%). This was achieved in spite of higher star-up costs from newly completed plants as well as higher foreign worker recruitment costs. TRPs division pulled back (PBT: -40.1%) due to lower sales deliveries and lower margin products.

YoY. Revenue declined a tad (-1.9% YoY) on the back of lower ASP (-6% YoY) despite improved sales volume (+3.8 YoY). EBITDA margin improved slightly (0.4ppts); consequently, core PATMI improved +23.6%. Gloves division improved (PBT: +5.6%) thanks to higher volume sold (+3.8%) but slightly offset by the increase in natural gas costs (+5.8%). On the other hand, TRPs division fell (PBT: -42.2%) attributed to lower sales deliveries and lower margin products.

FY19. Revenue improved to RM2,221.6m (+3.6% YoY) due to higher sales volume (+7.8%) despite lower ASP (-5%). EBITDA increased to RM383.8m (+12.9% YoY) whilst EBITDA margins improved by 1.4ppts to 17.3% (from 15.9%), hence, core PATMI was lifted to RM229.7m (+24.7% YoY). Glove division showed improvement (PBT: +14.4%) attributed to higher sales volume (+7.8%) from stronger demand growth as well as increased manufacturing efficiency and effective cost controls. However, TRPs division fell slightly (PBT: -4.1%) mainly due to lower sales deliveries.

Outlook. Plant 19 (3.0bn pieces) has commissioned 2 lines with another 2 lines currently being commissioned. Full commissioning of 10 lines is expected to be by 1H20. We expect stronger demand of gloves with respect to COVID-19 outbreak, and we comprehended that Kossan has seen increase in demand; however we choose to remain prudent by keeping our demand assumptions, as we are not certain on the actual quantum at this juncture and how long it will last.

Forecast. Maintain as the Results Were in Line.

Maintain HOLD, TP: RM5.00. We maintain HOLD with unchanged TP of RM5.00. To recap we changed our valuations on all glove companies under our coverage to +1.5SD in our Strategy report (3rd Feb); Kossan’s PE multiple was raised to 27x (from 23x), that increased our TP from RM4.44 to RM5.00. Out TP is based on mid-FY20 pegged to 27x PE (3-year mean)

Source: Hong Leong Investment Bank Research - 24 Feb 2020