Kossan’s (KRI) 9M18 net profit of RM142m (+3.2% yoy) was within expectations, achieving 70% and 68% of our and consensus full year estimates. Although net profit growth for the 9M18 is relatively flat, we believe that Kosan is finally back on right track to deliver stronger earnings growth, as net profit in 3Q18 grew by +24.6% qoq and +18.5% yoy. The strong performance in 3Q18 was due to the full commissioning of Plant 16, which was delayed for over a year. We reaffirm our BUY call and TP of RM5.15.

Positive Impact From the New Capacity

We believe that the strong earnings growth (+24.6% qoq; +18.5% yoy) delivered in 3Q18 is just the beginning of an earnings growth cycle for Kossan. The growth is due the full contribution of Plant 16 (3.0bn pcs), which was fully commissioned in August. We expect earnings in 4Q18 to be stronger, as Plant 17 (1.5bn pcs) was also fully commissioned recently, ahead of our expectation. We do not foresee any delays to the commissioning of Plant 18 & 19 (5.5bn pcs) by 2019, as the layout of the plants are similar to Plant 16 & 17.

Working Towards 76bn Pcs Capacity by 2028

As the overall utilisation rate remains healthy at above 85%, management will be pursuing its plans to add an additional 45bn pcs capacity in Bidor, Perak, which will increase in current capacity from 25bn pcs to 76bn pcs by 2028. The expansion will be done in phases commencing from 2020, and we expect management to be rational while securing orders upfront before building the lines. As the required utilities (natural gas, electricity and water) are readily available, we believe that the issues resulting in the delay in Plant 16 is unlikely to recur.

Reaffirm BUY Call and TP of RM5.15

No change to our forecast, as we believe the results is tracking along our expectations. We reaffirm our BUY call and 12-month TP of RM5.15 (based on an unchanged 27x 2019E PER), as we still believe in Kossan’s growth prospects. The delivery of the strong earnings growth in 3Q18, due to the commissioning of Plant 16 is the catalyst that will likely drive a rerating in its stock price.

Source: Affin Hwang Research - 19 Nov 2018