Kossan’s (KRI) 2017 net profit of RM184m (+10.1% yoy) fell short of our and consensus expectations (95% and 93% of street and our 2017 forecasts respectively). Despite benefiting from stronger glove demand, the better glove earnings were offset by the weaker performance of its technical rubber division. Management also proposed a 1 for 1 bonus issue, which is expected to be completed by the end of 3Q18. We maintain our HOLD call, despite raising our TP to RM8.40, as we believe the shares are already fairly valued.

Better Prospects Moving Into 2018

We expect a stronger earnings growth in 2018, due to 1) low base effect from the technical rubber segment, 2) glove capacity from Plant 16 to start contributing, and 3) new glove capacity from Plants 17 & 18 to contribute in phases. As glove demand remains robust, we are not overly perturbed by the influx of new capacity (~+15-20% yoy), as we believe KRI should be able to sell its new capacity, as its current lines are already operating at full capacity (above 80% utilisation rate). Margin per glove should also record some improvement, due to better efficiency from the new lines.

Expecting Some Recovery in 2018 for Technical Rubber

Although PBT for the technical rubber segment contracted by 47% yoy, we foresee a better outlook moving into 2018, as we believe KRI could benefit from the increase in infrastructure projects in Malaysia, as its product are being used on bridges and rail. As revenue for the segment is projectbased, there is the possibility that contributions from the segment could surprise us on the upside. Nevertheless, we don’t think the segment will be worse off in 2018, as the current base revenue is derived mainly from the stable automotive segment.

Maintain HOLD Call With a Higher TP of RM8.40

Despite trimming our 2018E and 2019E EPS by ~2% to factor in a weaker technical rubber segment, we are still fairly optimistic about KRI’s earnings outlook. We are raising our TP on KRI to RM8.40 (from RM7.40), based on a 2018E PER of 22x (from 19x), which is at +1stdev above its historical average, due to a re-rating of the sector. However, we are still maintaining our HOLD call, as we see KRI shares as fairly valued.

Source: Affin Hwang Research - 23 Feb 2018