Period

1Q15

Actual vs. Expectations

1Q15 net profit of RM45.5m (+23% YoY; +20% QoQ) came in within expectations, at 22% and 23% of our and consensus full-year forecasts, respectively.

Dividends

No dividend was declared for the quarter. Key Result

Highlights

Sequentially, 1Q15 revenue rose 2% to RM369m due to higher gloves sales volume (+4.5%) which more than offset lower ASP. The higher revenue was mainly attributed to the revamp of two old plants that brought about higher output from the more efficient and technologically advanced production as well as small capacity added from Plant 2 which commenced its trial run in March this year. The higher contribution from gloves more than offset weaker performance in Technical Rubber Products (TRP) with revenue and profit before taxation reduced by 25.1% and 67.8%, respectively due to weaker demand for industrial and automotive parts. Overall PBT margin improves 2.4pts from 16% in 1Q15 compared to 13.6% in 4Q14 due to production efficiency and better sales-mix.

YoY, 1Q15 revenue rose 20% due largely to contribution from gloves division, which accounted for more than 88% of total revenue. Specifically, gloves revenue rose 24% due to higher volume growth (+30%) on the back of 85% utilisation rate which morethan offset lower ASP (-10%). Net profit came in at RM45.5m (+23% YoY) which grew faster than the turnover growth due to margin 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, growth in subsequent quarters are driven by Plant 2 and 3 with 4b pieces per annum of capacity expected to be running at full capacity starting from Jun 15 onward. We understand that buyers have been found. 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. Despite the stock already gained 38% YTD, we continue to like Kossan. We expect strong subsequent quarters’ results and potential margin expansion to attract market attention. Consequently, we upgrade our TP from RM6.68 to RM7.06 based on 19x FY16 EPS (at +2.0 SD above its historical forward average).

We like Kossan for: (i) its superior net profit growth of 43% and 15% in FY15E and FY16E; and (ii) the unprecedented earnings growth over the next two years underpinned by rapid capacity expansion.

Risks to Our Call

Delay in commissioning of new production lines.

Source: Kenanga Research - 22 May 2015