Kossan’s (KRI) 1H18 net profit of RM88m (-4.4% yoy) fell short of our and consensus expectations, delivering only 41% and 42% of consensus expectation and ours. Despite the recovery in the technical rubber division, the weakness in the glove segment was unexpected. Nevertheless, we remain positive on the outlook of the company, as Plant 16 is fully commissioned and will start contributing meaningfully in 3Q18. We maintain our BUY call, with an unchanged TP of RM5.15.

New Capacity to Drive Growth

We are expecting 2H18 to deliver stronger growth, as KRI has managed to fully commission Plant 16 (3.0bn pcs) in Aug, adding around 14% of new capacity. Based on our understanding, the new capacity has been fully presold. Apart from Plant 16, KRI will also commission Plant 17 (1.5bn pcs) by year-end, which will raise the overall installed capacity by 20% yoy. Management is also targeting for Plant 18 (2.5bn pcs) and Plant 19 (3.0bn pcs) to be operational by 2019, which we believe is an achievable target. Plant utilisation remains above 85%, volume growth at 5.8% YTD.

Negatively Impacted by the Higher Cost

The weaker performance for KRI’s glove segment (PBT -8.65% yoy) was due to rising production cost and higher interest expenses. The higher interest expenses was attributed to the higher loan amount taken to acquire new land bank and working capital for the construction of Plant 17 and 18. Normalising the impact of the higher interest cost, PBT for the segment is still down by 4.9% yoy, which is still lower than our expectation. However, we are expecting a recovery in 2H, as management has guided that they have increased its ASPs to pass-on the higher nitrile cost.

Maintain BUY Call With An Unchanged TP of RM5.15

We have lowered our EPS forecast for FY18/19/20E by -3.3%/-0.2%/-0.3% after factoring in 1H18 results. We are still keeping our BUY and TP of RM5.15 (based on an unchanged 27x FY19 PER), as we still believe in Kossan’s growth prospects. The commissioning of Plant 16 is the catalyst that we have been waiting for, and will be the start of Kossan’s expansion cycle.

Key downside risks to our view include: i) sudden movements in the US$ against the RM, ii) sharp changes in raw-material prices, and iii) greaterthan-expected pricing competition among glove players.

Source: Affin Hwang Research - 20 Aug 2018