Period

2Q15/1H15

Actual vs. Expectations

1H15 net profit of RM92.9m (+30% YoY) came in within expectations, at 45% and 46% of our and consensus full-year forecasts, respectively.

Dividends

No dividend was declared for the quarter. Key Result

Highlights

YoY, 2Q15 revenue rose 5% due largely to contribution from gloves division, which accounted for more than 86% of total revenue. Specifically, gloves revenue rose 2% due to higher volume growth (+37%) on the back of 85% utilisation rate which more than offset lower ASP. This brings 1Q15 net profit to RM47.4m (+4% QoQ). Note that the product mix of nitrile and natural rubber in 2Q15 is 68:32 compared to 66:34 in 1Q15.

YoY, 1H15 revenue rose 23% to RM755m thanks to higher gloves’ sales volume (+36%) which more than offset lower ASPs. 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 additional small capacity added from Plant 2 which commenced its trial run in March this year. The solid performance was enhanced by better contribution from the Technical Rubber Products (TRP) with revenue and profit before taxation rising by 11% and 77%, respectively, due to better demand for infrastructure products.

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 July 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 gaining 63% 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 RM7.06 to RM8.16 based on 22x FY16 EPS (previously 19x), slightly below Hartalega’s PER valuation of 23x due to its potential margins enhancement upon commercial production of its plant 2 and 3 and its ability to increase product mix ratio skewed towards higher margin nitrile gloves.

We like Kossan for: (i) its superior net profit growth of 43% and 15% in FY15E and FY16E, respectively, 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 - 21 Aug 2015