Kossan’s (KRI) reported a very strong set of results, 1Q19 PATAMI of RM58.7m (+31.9% yoy; -1.3% qoq) is within our and consensus expectations, delivering 24% and 25% of our respective forecast. The strong performance was mainly driven by stronger sales volume from its gloves division, supported by the new capacity in 2H18. We expect Kossan to deliver stronger earnings in the upcoming quarters, as the latest Plant 18 & 19 will start contributing in 3Q19. Reaffirm our BUY call with a higher TP of RM6.00 as we roll forward our valuation horion to 2020.

Stronger Earnings Driven by Glove Operation

Despite the strengthening of RM in 1Q19, KRI manage to deliver a PBT of RM68m (+43% yoy; +9% qoq) for its glove operation. The growth is mainly driven by the higher sales volume (+18.8% yoy; +4.7% qoq), as KRI was able to reap full contribution from Plant 16 & 17, which were completed in 2H18. We believe that this set of earnings would help ease investors’ concern about the overcapacity surrounding the industry. We believe that the decline in ASP was mainly due to the lower raw material (nitrile rubber) price rather than price competition.

Technical Rubber Lower Profit Due to Higher Rubber Price

Although the glove segment managed to deliver a stronger yoy and qoq performance, the group performance was negatively impacted by the lower contribution from its technical rubber segment. 1Q19 PBT for the segment contracted by 19% qoq to RM6.8m. The lower profitability was due to lower deliveries and also the increase in latex prices. We are expecting a better performance in 2Q19, as latex prices has been on a declining trend since March. We are also keeping our growth forecast for the segment unchanged at 5-8% for FY19E.

Reaffirm BUY Call With a Higher TP of RM6.00

We are keeping our forecast unchanged, as the 1Q19 results is inline with our expectations. However, we are raising our 12-month TP to RM6.00 (based on 27x 2020E PER) as we roll forward our valuation horizon. Kossan also remains our top BUY pick for the sector and country.

Risks to Our Call

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 - 27 May 2019