Kossan’s (KRI) reported a decent set of results, FY18 net profit of RM201m (+9.2% yoy) was within expectations, achieving 99% and 98% of our and consensus full year estimates. Earnings growth is attributed to the increase production capacity for the glove segment and also the recovery profitability of its technical rubber segment. We are expecting Kossan to deliver stronger earnings growth for 2019, driven by new capacity from Plant 18 & 19. We reaffirm our BUY call and TP of RM5.15.

Plant 18 & 19 to Support Growth for 2019

We believe that 2019 will be a better year for Kossan, as it reaps the full contribution of the new plants (Plant 16 & 17) which was commissioned in 2H18. Plant 18 & 19 (5.5bn capacity) are also on track to be fully commissioned by end of 2019. As these newer plants are more integrated and effective, it would also contribute positively to KRI’s current profit margin. There is no significant progress update on the Bidor, Perak expansion plan, which is currently still in the planning stage.

Technical Rubber Recovery From Its Low

PBT contribution from the technical rubber segment has increased from RM16m in FY17 to RM28m in FY18, due to an increase in sales deliveries and also higher margin products. We believe that the margin improvement was also partly driven by declining raw material prices. We do not foresee the segment to deliver similar growth in FY19 (+75% yoy in FY18), as it was mainly due to the low base effect (PBT contribution in FY16 was RM30m). We are expecting the segment to grow steadily at around 5-8% for in FY19-20E.

Reaffirm BUY Call and TP of RM5.15

We tweak our forecast to incorporate the performance in 4QFY18. However, we are maintaining 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. Kossan also remains our top BUY pick for the sector and country.

Source: Affin Hwang Research - 19 Feb 2019