Period  4Q14/FY14

Actual vs. Expectations  Kossan Rubber Industries (KRI)’s FY14 net profit of RM143.8m (+5.4% YoY) came in within expectations, at 96% and 102% of our and consensus full-year forecasts, respectively.

Dividends  No dividend was declared for the quarter.

Key Result Highlights  Sequentially, 4Q14 revenue rose 10% to RM361m due to higher sales volume (+7%) which more than offset lower ASPs, on maiden contribution from additional new 5 lines in Plant 1. Additionally, Technical Rubber Products (TRP) division’s revenue rose 9% QoQ driven by higher exports sales in infrastructure products, automotive parts and dock fenders. EBITDA margin remain resilient at 18.1% compared to 18.4% in 3Q14. Overall, 3Q14 PATAMI rose 10% to RM37.9m.

 YoY, FY14 revenue fell 0.6% due to lower ASP but mitigated by a marginal rise in sales volume (+2%) due to the staggered conversion of lines from powdered natural latex gloves to powder-free nitrile gloves, and slower-than-expected commercial production of new plants. Furthermore, production output was also slightly affected during the statewide water rationing in the month of April. Net profit came in at RM143.8m (+5.4% YoY) which grew faster than the turnover growth due to margins expansion driven by efficiency improvement from automation, economies of scale from capacity expansion, and product mix skewed towards higher margin nitrile gloves.

Outlook  Looking ahead, earnings growth is expected to be driven by new capacity expansion. Plant 3 with a total of 6 lines has commenced commercial production in Jan 2015 and we understand that buyers have been secured. This brings the three new plants installed capacity to 22b from 16b per pieces of gloves per annum.

 We understand that another phase of expansion is expected sometime in FY15 due to overwhelming demand for various glove products. Recall, at end- Dec 2014, Kossan acquired a piece of freehold industrial land measuring 13.3 acres located in Kapar, for a cash consideration of RM39m. We understand the land is earmarked for two manufacturing glove plants and a warehouse, targeted for completion in FY16.

Change to Forecasts  No changes to our FY15E and FY16E numbers.

Rating & Valuation  Maintain OUTPERFORM. We roll forward our valuation from FY15E to FY16E. As such, our TP is raised from RM5.23 to RM6.00 based on an unchanged 16x FY16 EPS.

 We like Kossan for: (i) its superior net profit growth of 43% and 15% in FY15E and FY16E, compared to peers average of 10-12%, respectively, (ii) the unprecedented earnings growth over the next two years underpinned by rapid capacity expansion, and (iii) the fact that Kossan is not just a rubber glove play but also a play on its TRP division, which has grown steadily over the past few quarters.

Risks to Our Call  Delay in commissioning of new production lines. 

Source: Kenanga